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76 Cards in this Set
- Front
- Back
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Type of insurance company: Commercial insurers |
- also known as private insurance companies - are in the business of selling insurance for a profit - offer many lines of insurance; some sell primary life insurance in annuities, while others sell accident and health insurance, or property and casualty insurance |
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What type of insurance company that sells more than one line of insurance? |
Multi-line insurer |
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What are the two main groups of commercial insurance? |
Stock and mutual insurers |
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Type of insurance company: Stock companies |
organized and incorporated under state laws for the purpose of making a profit for its stockholders (shareholders) |
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Traditionally, stock insurers are called what and why? |
Traditionally, stock insurers are called non-participating insurers because policyholders do not participate in receiving dividends or electing the board of directors, unless they are also a stockholder of the company |
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Who is responsible to the stockholders in a stock company? |
The directors and officers |
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Fill in the blank: When declared, stock dividends are paid to ___. |
Stockholders |
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Mutualization and demutualization |
Transformation of a stock insurer into a mutual insurer is termed mutualization, and the reverse is termed demutualization |
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Fill in the blank: Dividends from a stock insurer, subject to ___ because they are considered profit. |
Taxation |
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Type of insurance company: Mutual companies |
- owned by policyholders - Mutual insurers are known as participating insures, because policyholders participate in receiving dividends and electing the board of directors |
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Fill in the blank: When declared, mutual company dividends are paid to ___. |
The policyholders |
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Why are dividends from a mutual insurer not subject to taxation? |
Because the dividends are considered to be a return of premium. The only exception is if the policy owner chooses to let the dividends sit and collect interest. In this case, only the accumulated interest would be taxable. |
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Type of insurance company: mixed insurer |
- if a company operates as both a participating and non-participating insurer, they are known as a mixed insurer - dividends can never be guaranteed, regardless of the type of company offering them |
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Type of insurance company: Strong assessment mutual companies |
Classified by the way they charge premium |
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Type of insurance company: Pure assessment mutual company |
- operates based on loss-sharing by group members - No premium is payable in advance. Instead, each member is assessed an individual portion of losses that occur. |
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Type of insurance company: Advance premium assessment mutual |
- charges a premium at the beginning of the policy period - If the original premiums exceed the operating expenses and losses, the surplus is returned to the policyholders as dividends. However, if total premiums are not enough to meet losses, additional assessments are levied against the members. Normally, the amount of assessment that may be levied is limited either by state law, or simply as a provision in the insurer’s bylaws. |
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Type of insurance company: Fraternal benefit societies |
- special types of mutual companies, nonprofit religious, ethnic, or charitable organizations that provide insurance solely to their members - fraternal must be formed for reasons other than obtaining insurance - an example of fraternal societies is Knights of Columbus |
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Type of insurance company: Risk retention groups |
- Mutual companies formed by a group of people in the same industry or profession - Examples would be pharmacist, dentists and engineers |
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Type of insurance company: Service providers |
- offer benefits to subscribers in return for the payment of a premium - The services are packaged into various plans, and those who purchase the plans are known as subscribers - Examples of service providers are health maintenance organizations (HMO) and preferred provider organizations (PPO)
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Type of insurance company: reciprocal insurers |
- unincorporated groups of individual members that provide insurance for other members through indemnity contacts - each member acts as both insurer and insured and are managed by attorney in fact
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Type of insurance company: Reinsurers |
- Make arrangements with other insurance companies to transfer a portion of their risk to the reinsurer - The company transferring the risk is called the Ceding Company and the company assuming the risk is the Reinsurer |
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Fill in the blank: in a reinsurance agreement, the insurance company that transfers its loss to another insurer is called what? |
The primary insurer |
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Type of insurance company: Captive insurer |
An insurer established and owned by the parent company to ensure the parent company’s loss exposure |
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Type of insurance company: home service insurers |
- also known as industrial insurance - sold by Home service or debit life insurance companies - Face amounts are small; usually $1000-$2000 and premiums are paid weekly |
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Type of insurance company: Government insurance |
- Federal and state government are also insurers - they provide social insurance programs, to protect against universal risk by redistributing income, to help people who cannot afford the cost of incurring such losses themselves - These programs have far reaching effects, and millions of people depend on them |
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What are the different types of government insurance? |
- social Security (old age, survivor disability insurance OASDI — provides income benefits for the elderly (retirement), survivors of those who die young (young child of a deceased parent), and those qualifying for federal disability - medicare – health insurance to care for the elderly - medicaid – health insurance to a financially needy - S.G.L.I. and V.G.L.I (Service man’s or veteran’s group life insurance: life insurance for active and retired members of the military) - Tri-care (health insurance for members of the military and their family) |
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Type of insurance company: self insurers |
- Retain risks and must have a large number of similar risks and enough capital to pay claims - They may save money if the loss experience is lower than the expected cost |
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True or false: Self insurers are a method of transferring risk |
FALSE; self insurers are not a method of transferring risk, rather self insurers establish their own self-funded plan to cover potential losses |
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What is a self-funded plan? |
A plan in which an employer pays insurance benefits from a fun derived from the employers current revenues |
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Lloyd’s of London |
- not an insurance company - Members of the association form syndicates to underwrite and issue insurance-like coverage - this is a group of investors who share in unusual risk |
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How insurance is sold: distribution systems |
- The ways insurance products are marketed and sold to the public - Insurance can be purchased through licensed insurance producers, who are either agents, or brokers, or through a number of other ways - Agents are either captive/career agents or independent agents - Captive agents work for only one insurer - independent agents work for themselves, or for several insures non-exclusively |
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How insurance is sold: career agency system |
- Insurers establish offices in certain locations where career agents are recruited to work - A general agent, hires and trains, new producers, and supervisors a number of other producers |
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What type of agent are all producers under the career agency system? |
Captive agents and employees of the insurer |
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How insurance is sold: Personal producing general agency system |
- agents work for an independent agency selling policies from several insurance companies - Unlike the career agency system, agents are not employees of the insurance company. Instead, they work for the PPGA. - Furthermore, personal producing general agents, primarily sell insurance, and instead of recruiting and training new agents as in the career agency system |
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How insurance is sold: Independent agency system (American agency system) |
- Independent agents represent a number of insurance companies under separate contractual agreements - They may also work for themselves or under other insurance agents - Independent insurance agents have control and ownership over their clients’ accounts. This means they may place clients’ business with a different insure when policies are up for renewal. - independent insurance agents earn commissions on the sales they make and overrides on sales made by agents they manage |
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How insurance is sold: managerial system |
- branch offices are established in several locations - instead of a general agent, running the agency, a salaried branch manager is employed by the insurer - The branch manager supervises agents working out of that branch office - The insurer pays the branch manager’s salary and pays him a bonus based on the amount and type of insurance sold and number of new agents hired |
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How insurance is sold: Mass marketing |
- Direct selling (or direct mail) is a mass marketing method where agents are not used - Instead, policies are marketed and sold through television and radio advertisements, print sources found in newspapers and magazines, by mail, in vending machines, and over the Internet |
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How is the insurance industry primarily regulated? |
On a state-by-state basis with minimal federal oversight. The primary purpose of this regulation is to promote public welfare and provide consumer protection and ensure fair trade practices, contracts, and prices. |
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1869 Paul v. Virginia |
The US Supreme Court ruled that insurance transactions crossing state lines are not interstate commerce |
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1905 the Armstrong investigation act |
Gave the authority to the states to regulate insurance |
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1944 United States v. southeastern underwriters Association |
Ruled that insurance transactions crossing state, lines are interstate commerce, and are subject to federal regulation. Thus, many federal laws were conflicting with existing state laws. However, this decision did not affect the power of states to regulate insurance. |
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1945 The McCarran Ferguson Act |
- States that while the federal government has authority to regulate the insurance industry, it would not exercise it’s right if the insurance industry was regulated effectively and adequately on the state level - Under this act, the minimum penalty of a producer who has obtained personal information about a client without having a legitimate reason to do so is a fine of $10,000 |
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1970 fair credit reporting act |
- Provides individuals privacy protection, and fair and accurate credit reporting - Insurance companies are required to notify applicants if a credit check will be made on them - under this act, the maximum penalty of a producer who has obtained consumer information reports under false pretenses is a fine of $5000 |
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1999 Gramm-Leach-Bliley Act (financial services modernization act) |
This law repealed the Glass-Steagall Act; this allows banks, retail brokerages and insurance companies to enter each other’s line of business |
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2001 USA patriot act |
(Uniting and strengthening America, by providing appropriate tools, required to intercept and obstruct terrorism act) - as it relates to the insurance industry, this is designed to detect and deter terrorists and their funding by imposing anti-money laundering requirements, or brokerage firms and financial institutions |
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2003 national do not call registry |
Insurance calls are not exempt from the do not call registry |
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2010 patient protection, and affordable care act (PPACA) |
- Often shortened to the affordable care act (ACA), represents one of the most significant regulatory overhauls and expansions of coverage in US history |
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The national Association of insurance commissioners (NAIC) |
- An organization composed of insurance commissioners from all 50 states, the District of Columbia and the four US territories - They are responsible for recommending appropriate laws and regulations - are responsible for the creation of the advertising code and the unfair trade practices act, and the Medicare supplement insurance minimum standards model act |
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What are the four broad objectives of the national Association of insurance commissioners (NAIC)? |
1. To encourage uniformity and state, insurance laws and regulations. 2. To assist the administration of those laws and regulations by promoting efficiency. 3. To protect the interest of policyowners and and consumers 4. To preserve state regulation of the insurance business. |
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Advertising code |
The code specifies certain words and phrases that are considered misleading and are not to be used in advertising of any kind |
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NAIFA |
- (National Association of insurance and financial advisors) and NAHU (national Association of health underwriters) - members of these organizations are life and health agents, dedicated to supporting the industry and advancing the quality of service provided by insurance professionals - these organizations created a code of ethics detailing the expectations of agents and their duties towards clients |
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To sell insurance, each state requires high-level of professionalism and ethics. What are some of these standards and ethics? |
- Selling to needs: agents must first determine the consumers’ needs then determine which policy fits their needs best - Suitability of recommended products: an ethical agent must be able to assess the correlation between a recommended product, and the consumer’s needs - Full and accurate disclosure: an ethical agent must inform consumer of the benefits and limitations of recommended products. Recommendations must be accurate, complete and clear. - Documentation: an ethical agent must document each clients meeting and transaction - Client services: an ethical agent must know that a sale does not mark the end of the relationship, but rather the beginning of the relationship. Therefore, routine follow up calls are recommended. - Buyer’s Guide: each state requires agents to deliver a buyers guide to consumers that explain various types of life, insurance products, and other information on the recommended policy, such as premiums dividends, and benefit amounts - Policy summary: helps consumers evaluate the suitability of the recommended product |
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Reserves |
The accounting measurement of an insurer’s future obligations to its policyholders. They are classified as liabilities on the insurance company’s accounting statements since they must be settled at a future date. They are also set aside by an insurance company and designated for the payment of future claims. |
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Liquidity |
An insurer’s ability to make unpredictable payouts to policyowners |
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Guaranty associations |
- Established by all states to support insurers and protect consumers in case an insurer becomes insolvent - State life and health guaranty associations provide a safety net for all member life, health and annuities insurers in a particular state - These associations provide insureds in the event of insurer insolvency, or inability to pay claims up to a certain limit |
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Independent rating services |
- Credit rating agencies, that rate or grade the financial strength and stability of insurers based on claims, reserves, and company profits - The nationally recognized statistical rating organizations that rate insurers are A.M. Best, Moody’s, Standard and Poor’s, and Fitch Ratings. - each rating service has its own rating system, but most use an A to F letter grading scheme |
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Hazard |
A condition or situation that creates or increases a chance of loss. For example, icy roads, driving while intoxicated, and properly stored toxic waste. |
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What are the different types of hazards? |
- physical – poor health, overweight, blind - moral - dishonesty, drugs, alcohol abuse - morale — careless attitude – reckless, driving, jumping off a cliff, stealing, racing, motorcycles, carefree, careless lifestyle. This attitude causes an indifference to loss. |
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Peril |
An immediate specific event, which causes loss such as an earthquake or tornado. It can also be referred to as the accident itself. |
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Risk |
The potential for loss |
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Speculative risk |
Is a risk that presents both the chance for loss or gain. Gambling is an example. These types of risks are not insurable. |
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Pure risk |
- The only insurable risk - Present a potential for loss only, such as injury, illness and death |
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Elements of insurable risk |
- loss must be due to chance — costless, outside the insured’s control - Loss must be definite and measurable — time, place amount, and when payable - Loss must be predictable — statistically, able to eliminate the average frequency and severity - Loss cannot be catastrophic — must be reasonable, $1 trillion policy is not reasonable. - Loss exposure to be insured must be large — ideally common enough that the insurer can pull homogenous or similar exposure units (law of large numbers). - Loss must be randomly selected - fair proportion of good and poor risks (adverse selection). |
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Law of large numbers |
The larger the amount of exposures that are combined into a group, the more certainty there is to the amount of loss incurred in any given period |
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What does the law of large numbers allow? |
- prediction of individual and group losses based on past experience - an increased degree of accuracy in predicting losses in large groups |
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Loss exposure |
In any situation that presents the possibility of a loss |
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Homogenous exposure units |
Similar objects of insurance that are exposed to the same group of perils. For example, ensuring a large number of homes in the same geographical area against hail damage. |
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Adverse selection |
Insurers must minimize adverse selection, which is defined as the tendency for poor than average risk to seek out insurance. For example, a person who takes 12 prescriptions is a poor risk. If an insurer cannot compensate poor risks with better than average risks, then its loss. Experience will increase, and its ability to pay claims may be compromised.. |
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Homogenous exposure units |
Similar objects of insurance that are exposed to the same group of perils. For example, ensuring a large number of homes in the same geographical area against hail damage. |
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Adverse selection |
Insurers must minimize adverse selection, which is defined as the tendency for poor than average risk to seek out insurance. For example, a person who takes 12 prescriptions is a poor risk. If an insurer cannot compensate poor risks with better than average risks, then its loss. Experience will increase, and its ability to pay claims may be compromised.. |
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Risk management |
The process of analyzing exposures that create risk and designing programs to handle them |
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Treatment of risk — how people deal with risk |
- avoidance – avoid the risk altogether. For example, you can avoid the risk of getting injured in a car accident by never leaving the house. - reduction – take precautions; minimizing severity of a potential loss. For example, you can reduce the risk of getting injured in a car accident by taking public transportation. - retention (self insure) - accepting a risk and confronting it if it occurs. For example, you would retain the risk of getting injured in a car accident by driving without insurance. - Transfer (transference) — make someone else responsible for a loss. For example, buying auto insurance transfers the cost associated with a car accident from the driver to the insurance company. Buying insurance is the best way to transfer risk. - risk pooling (loss sharing): when a large group of people spread a risk for a small certain cost. It transfers risk from an individual to a group group. An example of risk sharing would be doctors pulling their money to Cover malpractice exposures |
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Reinsurance |
Insurers deal with catastrophic loss through reinsurance, which is defined as a contractual agreement that transfers exposure from one insurer to another insurer |
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Principle of indemnity |
Involves making an insured hole by restoring them to the same condition as before a loss |
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Human life value approach |
A method of determining the financial value of a persons life based on computing the current value of a persons future earnings for a certain period of time. For example, if the main income owner of the family makes $50,000 a year and the family would like to make sure they are protective for 10 years in the event something happens to the main income owner. $50,000 (current income) x 10 years (protection) = $500,000 insurance policy |
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Needs based value approach |
A method of determining a persons financial value based on the amount of money needed for current and future expenses. These expenses include final expenses, spouses, income mortgage, college education, retirement, charity, donations, etc. for example, a family would like to ensure they can take care of five years of annual expenses if something were to happen to the main income earner and they have an average of $60,000 worth of expenses per year. $60,000 (expenses) x 5 years (protection) = $300,000 insurance policy |
