RMIN Test 2 Flashcards
Major types of Private Insurers
Stock insurers
Mutual insurers
Llyod’s of London
Fraternal insurers
Stock insurers (private insurers)
Corporation owned by stockholders
earn profit for stockholders by increasing the value of the stock and paying dividends
Ex: Allstate, MetLife, Progressive
Mutual insurers
Corporation owned by policyholders and profits are disturbuted to policyholders by dividends or rate reduction
EX:Statefarms, Nationwide, New York Life
Types of Mutual Insurers
Assessment Mutual –> Insurers has the right to asses policyholders an additional amount if the insurer’s financial operations are unfavorable
Advance Premium Mutual –>Insurer doesn’t issue assessable policies
Corporate structure of mutual insurers is changing due to:
Increase in company mergers
Demutualization, whereby a mutual company is converted into a stock insurer
Creation of mutual holding companies
Holding company is a company that directly or indirectly controls an authorized insurer
Llyod’s of London (private insurers)
World’s leading market that provides services and physical facilities for its members to write specialized lines of insurance
NOT an insurer; Only a market place
Structure
Llyod’s Brokers: represent policyholders to arrange coverage with syndicates
Llyod’s Syndicates: offer insurance contracts in the market
Members:
- Join together and provide capital form syndicates, receiving profits or bearing losses
- Most are corporations or limited partnerships
Managing Agents: manage the syndicates, who typically specialize in certain work for the syndicates to assess risks and determine premiums
Insurance Binders
Provide temporary evidence of insurance until the policy is actually written
Why can’t life insurance agents issue binders?
Adverse selection
Types of Insurance Agents
Independent → usually represents several unrelated insurers
Exclusive/Captive → represents only 1 insurer or group on insurers under common ownership
Legal Status of an Agent
Authorized agent can legally bind (issue a binder) the principal to a contract represents the insurance company
Brokers
Represents insureds, typically business firms and large corporations
- may provide other Risk Management services
Surplus Lines Brokers
Can deal with non-admitted insurers (An insurer not licensed to do business in the state)
Managing General Agents
Specialized producers with underwriting authority involed in surplus lines
Types of Marketing Systems
- Independent agency
- Exclusive agency
- Direct writer
- Direct response system
- Multiple distribution system
Independent agency system
Usually represents several unrelated insurers
Agency owns expirations or reneveal rights to the business
Agent may find coverage that is better suited for the client since not limited to 1 insurer
Agent may be authorized to adjust small claims and may provide loss control services to their insureds
Exclusive agency system
Agent → represents only 1 insurer or group of insurers under common ownership
Agents don’t own the expirations or renewal rights to the policiesMore frequently used in personal lines and very small business
Carrier provide resources and training since agents only sell products for this insurance company/principal
Direct Writer
Insurer in which salesperson is an employee of the insurer, not an independent contractor
Employees are usually compensated on a “salary plus” arrangement
Direct Response System
Insurer sells directly to the consumer by television or some other media
Major Operations of Insurance Companies
A. Ratemaking
B. Underwriting
C. Production
D. Claim Settlement
E. Reinsurance
F. Investments
G. Other Operations: Accounting, Legal Services, Loss Control, and Information Systems
Ratemaking
Pricing of insurance and calculation of insurance premiums
Rate → price per unit of insurance
Exposure unit → unit of measurement in insurance pricing
Premium=rate x exposure units
Actuary
person who uses complex statistical methods and technology to analyze loss and other data to determine rates and premiums
Goals:
Regulatory Goals:
- Rates must be adequate
- Rates must not be excessive
- Rates shouldn;t be unfairly discriminatory
Business Goals-
Rates should:
- Be stable
-Be responsive
- Provide for contingencies
- Be simple
- Promote loss control
Statement of Underwriting Policy
Included in the Underwriting Guide which states:
- lines of business written
- Policy forms and rating plans used
- Acceptable, borderline, and prohibited business
- Amounts of insurance that can be written
- Geographic territoires
Basic Underwriting Principles
- Seeking an underwriting profit
- Select prospective insureds according to the company’s underwriting standards
- Providing equity among policyholders
Additional Sources of Underwriting Information
- Application
- Agent’s report
- Inspection report
- Physical inspection
- Attending physician’s report and physical examination
- Medical Information Bureau (MIB) report
Other Underwriting Considerations
Are rates currently adequate?
Is reinsurance available?
Should existing business be canceled or non-renewed?
Basic Objectives in Claims Settlement
- Verification that a covered loss has occurred
- Fair and prompt payment of claims
- Providing personal assistance to the insured
Types of Claims Adjustors
- Agent
- Staff claims representative
- Independent adjustor
- Public adjustor
Insurance Agent (type of claim adjustors)
May have authority to settle small claims
Staff Claims Representatives (type of claims adjustors)
Salaried employee who investigates a claim, determines the amount of loss, and issues payment
Independent Adjusters
Individual or organization that adjusts the claim for a contracted fee (Very common after catastrophes.)
Public Adjusters
Represent the insured and are paid a fee based on the amount of the claim settlement
Steps in Settlement of a Claim
- Notice of loss to the company
- Investigation of the claim
- Filing a proof of loss
- Decision concerning payment
Reinsurance
primary insurer transfers to the reinsurer part or all of the potential losses
Ceding company (reinsurance)
insurer that initially writes the business
Net retentention (reinsurance)
the amount of insurance kept by the ceding company
Retrocession (reinsurance)
reinsurer obtains reinsurance
Reasons for Reinsurance
- Increase underwriting capacity
- To stabilize profits
- To reduce drain on surplus because of the unearned premium reserve
- To protect against a catastrophic loss
- To enable insurer to retire from a territory or a class of business
- To obtain underwriting advice form the reinsurer
Types of Reinsurance
- Facultative reinsurance
- Treaty reinsurance
Facultative Reinsurance
Reinsurance that is transacted on an individual risk (ex:large factory) where the primary insurer cedes the individual risk to the reinsurer
Treaty Reinsurance
Primary insurer cedes all risks within one or more specific lines of business to the reinsurer
Primary insurer must cede and resinsurer must accept all risks included within the terms of the reinsurance agreement
Life Insurance Investment
- Primary objective is safety of principal
- Yield is also important because it lowers the cost of life insurance
- Investments have considerable economic and social impact on the economy.
Property and Casualty Insurance Investments
Liquidity is more important than in life insurance (shorter period of time)
Investment income is important because it can offset any unfavorable underwriting results
Other Insurance Company Functions
A. Information Systems
B. Accounting
C. Legal Function
D. Loss Control Services
Methods for determining case reserves include:
- The judgment method: a claim reserve is established for each individual claim
- The average value method: an average value is assigned to each claim
- The tabular method: loss reserves are determined on data derived from mortality, morbidity, and remarriage tables
IBNR (incurred but not reported)
IBNR is often associated with delayed reporting which can be caused by a number of factors:
- bureaucratic red tape
- processing lag
- general consideration of the case
- legal issues
- collection of further information
Legal Principles of Insurance
Principle of Indemnity
Principle of Insurable Interest
Principle of Subrogation
Principle of Utmost Good Faith
Principle of Indemnity
Insurer agrees to pay no more than the actual amount of loss; the insured should not profit if a loss occurs
Actual Cash Value (principle of indemnity)
Replacement cost - depreciation
In property insurance; indemnification is based on actual cash value of the property at the time of loss
Exceptions to the principle of indemnity
- Valued policy –> Policy that pays the face amount (fixed value) of insurance if a total loss occurs (life insurance)
- Valued policy laws –> Insurers pays the full insured amount of property in event of a total loss
- Replacement cost insurance
- Life insurance
Purpose of Principle of Insurable Interest
- To prevent gambling
- To reduce moral hazard
- To measure the amount of the insured’s loss in property insurance
Examples of Insurable Interest
Ownership of property(house,car)
Potential legal liability (business owner)
Secured creditors (mortgage company, auto lender)
Contractual right (goods in transit)
When an Insurable interest must exist?
Life Insurance: At the time policy is purchases
Property: Must EXIST at both times of policy purchase and time of loss
Purpose of Subrogatoin
- To avoid collecting twice
- To hold the negligent person responsible
- To hold down rates
Representation (principle of utmost good faith)
Statement made by the applicant for insurance
What if the statement is false?
Contracts is voidable, if misrepresentation is:
Material, false and relied on by the insurer
Is the contract voidable?
Smoker lies on their life insurance application and later dies in an auto accident
Can be voidable since misrepresented on application
Insured’s bday on application is listed as Aug 1 when its Aug 11
No
Concealment (principle of utmost good faith)
Intentional failure of the applicant for insurance to reveal a material fact to the insurer
Contract can be voided if:
Concealed fact was known by the insured to be material
Insured intended to defraud the insurer
Warrenty (principle of utmost good faith)
Statement that becomes part of the insurance contract and is guaranteed by the maker to be true in all respects
Condition agree to by an insured in order to receive coverage
Violation of warranty may result in a claim being denied
Describe the Legal Requirements for the Formation of a Valid Insurance Contract
A. Offer and Acceptance –> The applicant usually makes the offer
- The insurer accepts or rejects the offer
- Agent’s authority to bind the insurer varies by type of insurance
B. Exchange of Consideration –> Insured’s consideration generally is payment of the first premium
- Insurer’s consideration is the promise to perform the contract.
C. Competent Parties
D. Legal Purpose
Distinct Legal Characteristics of Insurance Contracts
A. Insurance is an Aleatory Contract.
B. Insurance is a Unilateral Contract
C. Insurance is a Conditional Contract
D. Insurance is a Personal Contract
E. Insurance Contracts are Contracts of Adhesion
Insurance is an Aleatory Contract.
Values exchanged may not be equal but depend on an uncertain event.
Examples: Mia Wallace pays $1,000 for homeowners insurance. Her house burns down and the insurance company pays her $200,000.
Jules Winnfield has paid $1,000 a year every year for 20 years for homeowners insurance. He’s never filed a claim so his insurer has never paid him any money.
Insurance is a Unilateral Contract.
Only one party (insurer) makes a legally enforceable promise
Insurer makes legally enforceable promise to pay claims.
Insured cannot be legally required to pay premiums
Insurance is a Conditional Contract
The insured must comply with all policy conditions to collect for a covered loss.
Conditions - Provisions within the policy that qualify or place limitations on the insurer’s promise to perform.
Example – Your Duties After Loss
- Give immediate notice to us or our agent.
- Protect the property from further damage.
Insurance is a Personal Contract
Contract is between the insured and insurer
Policy cannot be validly assigned to another party without the insurer’s consent
Insurance Contracts are Contracts of Adhesion
Insured must accept the entire contract, with all of its terms and conditions.
Because this is imbalanced, courts have ruled that any ambiguities or uncertainties in the contract are construed against the insurer.
Principle of Reasonable Expectations
An insured is entitled to coverage under a policy that he or she reasonably e
Wavier
voluntary relinquishment of a known legal right
Estoppel
representation of fact made by one person to another
person that is reasonably relied on by that person to such an extent that it would be inequitable to allow the first person to deny the truth of the representation
Reasons for Insurance Regulation
A.Maintain Insurer Solvency
B. Compensate for Inadequate Consumer Knowledge
C.Ensure Reasonable Rates
D. Make Insurance Available
McCarran-Ferguson Act (1945)
Established that insurance should be regulated and taxed by the states
Federal antitrust laws do not apply to insurance (some exceptions)
Gramm-Leach-Bliley Act (also called the Financial Modernization Act of 1999)
Eliminated barriers between insurers and banks
Insurers can have banking operations and banks can have insurance operations
Led to several mergers and acquisitions
Created some confusion as to who would regulate each division
Frequently sited as a contributor to the financial crisis (2008)
Dodd-Frank Wall Street Reform and Consumer Protection Act (2010)
Established general federal oversight of the insurance industry
Created financial stability oversight council (FSOC)
Authority to treat systemic risk (collapse of entire financial system due to the failure of a single entity or group of entities)
Can classify non-bank financial companies (includes insurance companies) as “systemically important financial institutions” ((SIFIs)
SIFIs receive tougher financial oversight and regulated by the federal reserve
Domestic Insurer
Domiciled in the state (within state)
Foreign Insurer
Chartered (domiciled) in another state, but licensed to operate in the state
Alien Insurer
chartered in a foreign country, but licensed to operate in the state
Solvency Regulation (areas that are regulated)
- Admitted assets
- Reserves
- Surplus
- Risk-based capital
- Investments
- Dividend policy
- Reports and examinations
- Liquidation of insurers
Rate Regulation
Prior-approval → rates must be filed and approved by the state before being used
File-and-use→ rates must be filed with the state, but can be used immediately
Other Methods → modified prioval approval, use-and-file, flex-rating, state-made rates, and no filing required
Policy Forms
Must be filed with state department of insurance
Purpose: protect consumers from misleading, deceptive, or unfair provisions
Licensing - Sales Practices and Consumer Protection
All states require:
Licensing of brokers and agents
Continuing education for brokers and agents
Twisting - Unfair trade practices -Sales Practices Consumer Protection
Inducement of policyholders to drop an existing policy and replace it with a new one that provides little or no economic benefit to the client
Rebating- Unfair trade practices -Sales Practices Consumer Protection
Practice of giving an individual a premium reduction or some other financial advantage not stated in the policy as an inducement to purchase the policy
Taxation of Insurers -What areas are regulated?
Insurers pay a state tax on gross premiums received from policyholders
Prior-approval law (type of rating laws)
rates must be filed and approved by the state before being used
File-and-use law
rates must be filed with the state, but can be used immediately
Other Methods of Rating Laws
modified prioval approval, use-and-file, flex-rating, state-made rates, and no filing required
Claimed Advantages of Federal Regulation
Decrease compliance cost
* Increase competition.
* Increase innovation.
* More effective negotiations of international insurance agreements.
* More effective treatment of systemic risk
Claimed Advantages of State Regulation
Needs of each state are different.
* Federal regulation in historically inefficient.
* Transition to federal would be costly and require dual regulation for a short time.
* The National Association of Insurance Commissioners (NAIC) already advocates for uniformity
* Insurers can innovate by experimenting in different states
* Unknown consequences of federal regulation
Basis Parts of an Insurance Contract
A. Declarations Page
B. Definitions
C.Insuring Agreement
D.Exclusions
E. Conditions
F. Endorsements/Riders
Declarations (part of an Insurance contract)
Statements that provide information about the particular property or activity to be insured
- Name of Insurer and Insured
- Property Location
- Policy Period (Dates)
- Amount(s) of Insurance (limits)
- Premium
- Deductible(s)
- Other Relevant info
Definitions (part of an insurance contract)
Key words or phrases are defined so that coverage under the policy can be determined more easily
“We”, “us”, and “out” refer to the insurer
“You”, and “your” refer to the insured
Any words NOT defined by the policy → standard dictionary definition applies
Insuring Agreement (part of an Insurance contract)
Summaries of the major promises of the insure (what the policy covers)
Names Perils → only perils specifically names in the policy are covered
Open Perils → (all perils, special coverage) all perils are covered except for those specifically excluded
Which is better? Open Perils
Exclusions (part of an insurance contract)
Insurance contracts contain 3 types of exclusions:
Excluded perils → flood, intentional act, war
Excluded losses → professional liability loss is excluded in the homeowners policy
Excluded property →pets aren’t covered as personal property in homeowners policy, money (cash) limited to 200
Why are exclusions necessary?
Certain perils considered uninsurable → Flood, war
Presence of extraordinary hazards → Using personal vehicle as a taxi or for Uber, Lyft
Coverage provided by other contracts → Use of auto is excluded by homeowners policy
Moral hazard → Money (cash) limited to $200 within homeowners policy
Attitudinal hazard → Losses due to freezing of pipes are only covered if there was reasonable care to maintain heat in the building.
Coverage not needed by typical insureds → Homeowners policy does not cover aircraft or professional liability
Conditions (part of an insurance contract)
Provisions in the policy that qualify or place limitations on the insurer’s promise to perform
Ex:
Prompt notification of loss
Protect property from further loss
valuation/loss settlement - ACV vs RC
No concealment or fraud
Subrogation
If policy conditions aren’t met → insurer can refuse to pay the claim
Endorsement/Riders (part of an insurance contract)
Provisions that add to, delete from, or modify the original/main policy
Ex:
Replacement cost coverage for personal property
wind/hail exclusion
Language to comply with state law (uninsured motorist)
Earthquake endorsement to a homeowners policy
Name insured
Person(s) or party named on the declaration page of the policy
First Named Insured
Certain additional rights and responsibilities that don’t apply to other named insureds
Other Insureds
Person or parties who are insured under the policy even though they are not specifically named
Additional Insureds
person or party added to the policy by an endorsement
Purpose of Deductibles
- Eliminate small claims
- Reduce premiums
- Reduce moral and attitudinal hazard
Deductible
Provision by which a specified amount is subtracted from the total loss payment that would otherwise by payable
Straight Deductible
amount the insured is responsible for per loss before the insurer pays anything
Ex: 1,000 deductible
Accident 1 on 4/20
10,000 damages
Insured pays 1,000, insurer pays 9,000
Accident 2 on 6/15
900 damages
Insured pays 900, insurer pays 0
Aggregate Deductible
amount the insured is responsible for in total (over all losses during the policy period) before the insurer pays anything
Ex: $1,000 annual aggregate deductible
Dr. appt. 1 on 1/31
Costs 600
Insured pays 600, insurer pays 0
Dr. appt 2 on 2/17
Costs 900
Insured pays 400, insurer pays 500
Elimination (Waiting) Period
Started period of time at the beginning of a loss during which no insurance benefits are paid
Common in disability insurance - typically cannot collect until you’ve been out of work doe 30,60, or 90 days
Nature of Coinsurance
Cost-sharing arrangement between the insured and the insurer (both parties share the financial responsibility for a covered loss after the deductible has been met)
Purpose of Coinsurance
to achieve equity in rating
Coinsurance in Health Insurance
Provision that requires the insured to pay a specified percentage of covered medical expenses after the deductible is met.
Reduces premiums and prevents overutilization of policy benefits.
If you have to pay for a portion of it, are you going to get a medical test you don’t think you need?
Example:
1,000 deductible
80/20 coinsurance (insurer pays 80%)
5000 medical procedure
How much does the health insurer pay?
5000-1000= 4000 x .8= 3200
Pro Rata Liability
Each insurer’s share of a loss is based on the proportion that its insurance bears to the total amount of insurance on the property
Contribution by Equal Shares
Each insurer shares equally in the loss until the share paid by each insurer equals the lowest limit of liability under any policy, or until the full amount of the loss is paid
Primary and Excess Insurance
Primary insurer pays first, and the excess insurer pays only after the policy limits under the primary policy are exhausted
EX: Umbrella insurance (excess)
Fraternal insurers
Provides life and health insurance to members of a social or religious organization
