Insurance Policy and Company Selection Flashcards
What are two requirements of a good insurance policy?
Meets the consumer’s needs.
Policy amount is no more than required.
Insurance Trends
Trends suggest that people tend to buy too much insurance for low severity, high-frequency losses, and purchase inadequate coverage for high severity, low frequency exposures. An example of such a mistake would be to purchase a service contract on a new car extending the warranty several years, while simultaneously driving with the minimum amount of liability coverage.
How much life insurance policy to buy
If a gap exists between financial needs and available assets, this gap is the appropriate amount of insurance to purchase.
What are the tests for choosing the Right Insurance Company
Strength … A company whose financial strength is not questionable.
Claims … A company that honors insureds’ legitimate claims.
Agents … An insurer whose agents are trained adequately.
Coverage … A company whose policies offer coverage as valuable or better than that offered by other companies.
Insurance Consumer making decision
The insurance consumer must make five separate choices. These include
1. selecting a company
2. selecting an agent
3. selecting a suitable policy that meets their needs
4. deciding the appropriate amount of insurance
5. purchasing a policy at the best price.
McCarran-Ferguson Act
The governing federal insurance law is the McCarran-Ferguson Act (Public Law 15). In a most unusual outcome for a federal law, the McCarran-Ferguson Act turns over the regulation of the insurance industry to the states. Specifically
- It allows insurers to share related information that lowers their cost of doing business.
- It provides insurers with a narrow and limited exemption from federal antitrust laws as long as states regulate that activity.
- It explicitly empowers the states to regulate and tax insurance.
Pricing of insurance offerings
In an insurance marketplace, free price competition cannot be relied upon to promote customer welfare. So solvency regulation is used as a substitute for unrestrained competition. Insurers have to get prior approval from the regulator before using the rate, the first method used in solvency regulation. The second method is the open rate method.
Open rating allows an insurer to use whatever rate it chooses after filing the rate and the supporting statistics with the regulator. Open rating, the more popular scheme, allows the regulator to disapprove any rates being used. Such regulatory disapproval means the insurer must stop using the rates. This approach allows more freedom for insurers to compete on prices, with some regulatory control retained.
National Assoc. of Insurance Commissioners (NAIC)
The NAIC is a private, nonprofit association of the state insurance commissioners that provides some uniformity to state insurance regulation.
The NAIC was formed in 1871 by the state insurance regulators to help coordinate the regulation of insurance companies that did business in many different states. Although it has no legal power to enforce regulation, it has significant influence, and its Model Laws are frequently adopted by the states.
Legal Reserves and Surplus
An insurer must at all times comply with the reserve and surplus requirements of the state in which it is domiciled. The law requires an insurer to maintain minimum reserves on the liability side of its balance sheet.
The difference between the investable assets and the liabilities is called the reserve and/or surplus.
Loss Reserve
The loss reserve is set up to account for unpaid losses and is especially important for insurers writing liability insurance. The claims covered by this reserve account may be losses not yet reported to the insurer or losses that have been reported but for which claims have not yet been paid.
conservatorship, rehabilitation or receivership.
State regulators are likely to intervene in an insurer’s independent operations when the company’s surplus accounts reach an unacceptably low level, or if the company’s conduct appears to be jeopardizing the policy owner’s interests. Regulators call the first phase of intervention conservatorship, rehabilitation or receivership
Liquidation
If conservatorship or rehabilitation phase fails to correct the problems, regulators can order the next level of intervention: liquidation. In the case of small insurers, the state may try to rehabilitate the company, find a solvent insurer to assume the business, or liquidate the company using the guaranty fund.
Investment Activities by insurance companies
Insurance companies are not free to invest funds in all available alternatives provided by the capital markets. Also, as inferior investments may jeopardize insurer solvency, the states have established strict limitations on the types of investments insurers may make. State regulation specifies the classes of acceptable and unacceptable investments and the method used to value assets.
