Chapter 2 Notes

Provide common examples of federal government insurance programs

Common examples of federal government insurance plans include the National Flood Insurance Program (NFIP), The Terrorism Risk Insurance (TRIP), and federal crop insurance

Provide an example of a government insurance program formed to fulfill an unmet need in the private insurance market

Ex of gov insurance program formed to fulfill the unmet need is the Terrorism Risk Insurance Program (TRIP). The program was intended as a temporary provider of reinsurance for losses caused by terrorism and was designed to run until the end of 2005, but was subsequently extended b/c the private market for terrorism insurance and reinsurance was not deemed adequate to let it expire as originally anticipated

Provide common examples of state government insurance programs

Examples of state gov insurance program include WC plans, residual auto plans, and beach and windstorm plans

Describe a nonadmitted insurer, and explain how nonadmitted insurers can transact business in a state

Nonadmitted insurer is often referred to as a surplus lines insurer, is not authorized by the insurance dept to do business within that state. Under surplus lines laws, a nonadmitted insurer may be permitted to transact business only through a specifically licensed to do a business the US states where it wishes to operate.

Examples of Property-Casualty Insurance offered by the Federal Gov

National Flood Insurance Program, Terrorism Risk Insurance, Federal Crop Insurance

What are the six activities used when evaluating a claim

1) Acknowledging a claim and assigning it to a claim representative 2) Identifying the policy 3) Contacting the insured or the insured's representative 4) Investigating and documenting the claim 5) Determining cause of loss and loss amount 6) Concluding the claim

Foreign Insurer

Insurer licensed to operate in a state but incorporated in another state

Explain why insurance regulators try to maintain and enhance the financial condition of private insurers (FINANCIAL GAIN)

Insurers hold substantial funds for the ultimate benefit of policyholders. Government regulation is necessary to safegaurd such funds

file-and-use law

An insurance rating law in which the insurer must file rates and supporting rules with the state insurance department prior to their use, but the rates can then be used immediate without specific approval

Mutual Insurer

An insurer that is owned by its policyholders and formed as a corporation for the purpose of proving insurance to them

Stock insurer

An insurer that is owned by its stockholders and formed as a corporation for the purpose of earning a profit for the stockholders

Admitted Insurer

An insurer to which a state insurance department has granted a license to do business within that state

Surplus lines laws

State Laws that permit producers with a surplus lines license to write business for an acceptable "nonadmitted insurer when protection from admitted insurers is not available

List the four methods regulators use to verify insurers solvency

- Establish financial requirements by which to measure solvency - Conduct on-site field examinations to ensure regulatory compliance -Review annual financial statements - Administer the insurance Regulatory Information Systems (IRIS)

Identify five activities an attorney-in-fact of a reciprocal insurance exchange undertakes for the subscribers

In reciprocal insurance exchange, an attorney-in-fact on behalf of the subscribers to market and underwrite insurance coverage, collect premiums, invest funds, and handle claims.

Private Insurer

A nongovernment insurance provider

Captive Insurer, or captive

A subsidiary formed to insure the loss exposures of its parent company and the parent's affiliates.

What are the 3 deciding factors in order to approve or disapprove an insurers request for a rate

Adequate-Rates should be sufficient to pay all claims and the expenses related to those claims, helping to maintain insurer solvency Not Excessive-Insurers are entitled to a fair return but not to excessive or unreasonable profit Not unfairly discriminatory-Insurers are permitted to adjust premium rated base on the risk profile of different groups of insureds, but these rates must be fair and consistent. Insureds with similar loss exposures should be charged similar rates

Nonadmitted Insurer

An insurer not authorized by the state insurance department to do business within that state

Market Conduct Regulation

Regulation of the practices of insurers in regard to four areas of operation: sales practices, underwriting practices, claim practices, and bad-faith actions

Why are surplus lines insurers generally exempt from insurance regulations pertaining to policy forms and rates

Surplus lines insurers are willing to provide coverage for risks that admitted insurers are unable or unwilling to offer. B/c these insurers increase the the availability of insurance, they have the freedom to use policy provisions and rates that are appropriate for a particular risk

Solvency

The ability of an insurer to meet its financial obligations as they become due, even those resulting from insured losses that may be claimed several years in the future.

Reserve

The amount the insurer estimates and sets aside to pay on an existing claim that has not been settled

Explain why the surplus lines market can respond more quickly to immediate needs for new types of coverage than standard market insurers

The surplus lines market can respond quickly to immediate needs for new types of coverage b/c standard market insurers often take longer to analyze the need for new or revised coverage and to file policy forms and rates for state approval

Under most state unfair trade practices laws, what penalties can be imposed in each of the following circumstances? a) An insurance agent engages in unfair trade practices? b) An insurance is guilty of unfair underwriting practices?

These penalties can be imposed under most state unfair trade practices laws: A. State regulators can suspend or revoke the licenses of sales agents or brokers who engage in unfair trade practices B. An insurer that is guilty of an unfair underwriting practices could be fined, or its operating license in a state could be suspended or revoked

Prior-approval law

an insurance rating law in which the rates and supporting rules must be filed with and approved by the state insurance dept before they can be used

Identify the three levels at which the government can participate in an insurance program

as an exclusive insurer, as a partner with a private insurer, or as an insurer in direct competition with private insurers

What are the three most common forms of insurer ownership

stock insurance companies mutual insurance companies reciprocal insurance exchange

Underwriting

the process of selecting insureds, pricing coverage, determining insurance policy terms and conditions, and then monitoring the underwriting decisions made.

Reinsurance

the transfer of insurance risk from one insurer to another through contractual agreement under which one insurer (the reinsurer) agrees, in return for a reinsurance premium, to indemnify another reinsurer (the primary insurer) for some or all of the financial consequences of certain loss exposures covered by the primaries insurance policy

Describe the requirements a surplus lines licensee must fulfill before it can insure a particular risk with a surplus lines insurer

Before it can insure a particular risk, a surplus lines licensee must document that a diligent search for coverage in the standard (admitted) market has been performed

Compare a foreign insurer to an alien insurer

Foreign insurer is licensed in the US as an Alien insurer is licensed outside the US.

Insurance policy language is usually regulated for what purpose?

Regulators review insurance language to protect consumers. Many insurance policies are complex legal docs that may be difficult for some consumers to analyze and understand. Regulators can set coverage standards, specify policy language for certain insurance coverage, and disapprove

What does marketing involve

determining the products or services customers want and need and delivering them to the customers

ABC Company is an insurer incorporated and licensed in one state. ABC would like to expand into a neighboring state. What requirements will ABC need to meet in order to be licensed in the neighboring state

ABC will first need to show the regulator in the neighboring state that it has satisfied the requirements in its home state. ABC will also need to satisfy the minimum capital, surplus, and other requirements imposed on domestic insurers within then neighboring sate.

Standard Market

Collectively, insurers who voluntarily offer insurance coverages at rates designed for customers with average or better than average loss exposures

What are the two major objectives of regulations regarding insurance policy forms

1st objective is that the insurance policies be clear and readable to insurance consumers. The 2nd major objective is to detect and address any policies provisions that are unfair or unreasonable

Insurance regulatory Information system (IRIS)

An information and early-warning system established and operated by the NAIC to monitor the financial soundness of insurers

Identify four main purposes of government insurance programs

Government insurance programs exist to fill unmet needs in the private insurance market, to facilitate compulsory insurance purchases, to provide efficiency in the market and convenience to insureds, and to achieve collateral social purposes.

What observations about policyholders might premium auditors be able to refer to insurer underwriters b/c of their direct contact with policyholders?

Premium auditors can notify underwriters of larger loss exposures than originally contemplated, unacceptable operations, new products, new operations, or financial problems.

Insurers are regulated primarily for what 3 reasons

Protect consumers Maintain insurer solvency Prevent destructive competition

Insurance Licensing

In US --> Domestic Insurer In US but diff State --> Foreign Insurer Outside of US --> Alien Insurer Surplus lines -->Specially licensed insurer

Describe open-competition laws

In open-competition rating, market prices driven by the economic laws of supply and demand, rather than regulatory decisions, determine insurance rates. However, state insurance departments typically have the authority to monitor competition and disapprove rates if deemed necessary. The major criteria that rates must be adequate, not excessive, and not unfairly discriminatory continue to apply.

Describe how different states meet the 3 major criteria for insurance rates

Mandatory rate Law - Rate law that imposes the strictest control of an insurer's rates Prior-Approval Law - Insurers cannot charge a rate until it is approved by the state regulators File-and-Use Law - Insurers must file proposed rates but can use the rated while approval is pending Use-and-File Law - Variation of the file-and-use law that provides more flexibility for insurers in setting rates Flex rating law - Increases the amount of flexibility for insurers in their rate determinants Open Competition - Market prices driven by the economic laws of supply and demand, rather than regulatory decisions, determine insurance rates. However, state insurance dept typically have the authority to monitor competition and disapprove rates if deemed necessary. The major criteria that rates must be adequate, not excessive, and not unfairly discriminatory

Compare the organization of a stock insurer and a mutual insurer

Stockholders supply the capital needed to form a stock insurer or to expand its operations. Stock holders expect to receive a return on their investment in the form of stock dividends, increased stock value, or both. A mutual insurer is owned by it policyholders. B/c a traditional mutual insurer issues no common stock, it has no stock holders. Stockholders and policyholders have similar voting rights and elect the insurer's board of directors

NAIC Annual Statement

The primary financial statement prepared by insurers and required by every state insurance department

Solvency Surveillance

The process, conducted by state insurance regulators, of verifying the solvency of insurers and determining whether their financial condition enables them to meet their financial obligations and to remain in business

What is the purpose of the claim handling process?

The purpose of the claim handling process is to achieve a fair and equitable settlement based on the circumstances of the loss.

Identify three reasons why captive insurers became more prevalent in the late 1970s and early 1980s

They might provide a lower insurance cost than other private insurers. They help ease the problems of availability and affordability for a parent company with loss exposure that may be difficult to insure. They can provide improved cash flow that results when the corporation invests funds instead of paying premiums to an unrelated insurer

Risk Control

a conscious act or decision not to act that reduces the freq and/or severity of losses or makes losses more predictable

Claim

a demand by a person or business seeking to recover from an insurer for a loss that may be covered by an insurance policy.

Explain why government programs are needed to facilitate compulsory insurance purchase

because not everyone required to to purchase such insurance can obtain coverage at a reasonable price in the private market

Describe how gov insurance programs improve market efficiency

by reducing either the time or the resources insured need to expend to obtain the desired insurance coverage

Describe a reciprocal insurance exchange

consists of a series of private contracts in which subscribers or members of the group, agree to insure each other

What is the purpose of licensing individual insurance professional such as producers and claim representatives

examinations are required for licensing, along with continuing education requirements, attempt to ensure that insurance professionals have a minimum level of insurance knowledge and meet ethical standards

Guaranty fund

A state-established fund that provides a system for the payment of some of the unpaid claims of insolvent insurers licensed in that state, generally funded by assessments collected from all insurers licensed in the state

A state insurance department has received several complaints alleging that insurance Company is slow to resolve claims and then denies them w/out explanation. A) How is the dept of insurance likely to follow up on these complaints? B) This insurance dept activity is an example of what type of regulatory oversight?

A) The Insurance department may investigate the complaints and may hold a formal hearing as part of the investigation process. If the investigation indicated that the allegations are true, the department may assess a fine against the Insurance Company B) The Insurance Dept activity is an ex of regulating market conduct.

National Association of Insurance Commissioners (NAIC)

An association of insurance commissioners from the fifty US States, the District of Columbia, and the five US territories and possessions, whose purpose is to coordinate insurance regulation activities among the various state insurance depts

Use-and-File Law

An insurance rating law in which the rates must be filed with the state insurance department within a specified period after they are put into use

Open competition (No-File Law)

An insurance rating law that allows insurers to develop and use rates without having to file with or get approval from the state insurance department.

Flex rating law

An insurance rating law under which prior approval is required only if the new rates exceed a certain % above the rates previously filed

Domestic Insurer

An insurer doing business in the jursidicition in which it is incorporated

Alien Insurer

An insurer domiciled in a country other than the US

Underwriter

An insurer employee who evaluates applicants for insurance, selects those are acceptable to the insurer, prices coverage, and determines policy terms and conditions

Reciprocal Insurance exchange (interinsurance exvhange)

An insurer owend by its policyholders, formed as an unincorporated association for the purpose of providing insurance coverage to its members (called subscribers), and managed by an attorney-in-fact. Members agree to mutually insure each other, and they share profits and losses in the same proportion as the amount of insurance purchased from the exchange by that member.

What are the three primary forms of an insurer's licensing status in any given state

An insurers licensing status in any given state may assume that of a domestic insurer, a foreign insurer, or alien insurer

A new insurer in a state that has an open-competition rating law is charging rate for auto insurance policies that are much lower than those of all of the other auto insurers in the state. Many of the other insurers express concern to the insurance commissioner that these rates are too low. Can the commissioner take action on the complaint in an open-competition rating system.

As long as the criteria is met for insurance rated. That is Addequate, not excessive, and not unfairly discrimitory, the insurance commissioner can step in if it is necessary.

Example of Property-Casualty Insurance offered by the State Gov

Fair Access to Insurance Requirements (FAIR) Plans, Workers Compensation, Beach and Windstorm Plans, Residual Auto Plans

Identify five classes of business often insured in the surplus lines market

Five classes of business often insured in the surplus lines market are unusual or unique loss exposurers, nonstandard business, insureds needing high limits of coverage, insured needing unusually broad coverage, and loss exposures that require new forms

Surplus lines insurance

Insurance obtained from nonadmitted insurers when protection is not available from admitted insurers

Explain why insurance regulators try to maintain and enhance the financial condition of private insurers (PREMIUMS)

Insurance regulators try to maintain and enhance the financial condition of private insurers for several reasons: Premiums are paid in advance, and the period of protection extends into the future. If an insurer, becomes insovlent, future claims might not be paid even though the premiums has been paid. Consumers may find it difficult to evaluate insurers financial ability to keep these promises.

What is the focus of market conduct regulation?

Market conduct regulation focuses on insurers treatment of applicants for insurance, insureds, and others who present claims for coverage

Premium Audit

Methodical examination of a policyholder's operations, records, and books of account to determine the actual exposure units and premium for insurance coverages already provided.

Explain two similarities between mutual insurers and stock insurers regarding earnings

Mutual insurers generally seek to earn profits for their ongoing operations, as do stock insurers. A stock insurer may choose to share profits with its stockholders by the payments of dividends which are a return on the stockholders' investment. Mutual insurers also may opt to share profits, but pay dividends instead to policyholders as a return of a portion of the premium.

Explain why insurance regulators try to maintain and enhance the financial condition of private insurers (PUBLIC INTEREST)

Regulation is needed to protect the public interest. Large numbers of individuals are adversely affected when insurers become insolvent. Ex., an unusually large catastrophe that affects a large area can make an insurer's financial ability to pay claims uncertain, such as when Hurr Andrew struck in 1992 and caused seven insurer insolvencies

Explain why standard market insurers are often unwilling to provide coverage for loss exposure for which a large number of similar exposure unite do not exist.

Standard mrket insurers are often unwilling to provide coverage for loss exposures for which a large number of similar exposure units do not exist b/c coverage for such loss is hard to price

Unfair trade practices law

State law that specifies certain prohibited business practices

Mandatory Rate Law

State law under which insurance rates are set by a state agency or rating bureau and all licensed insurers are required to use those rates

What is the goal of underwriting when determining the price for insurance

The goal of underwriting is to charge a premium that is commensurate with the loss exposure. In other words, each insured's premium should be set at a level that is adequate to enable the total premiums paid by a large group of similar insured to pay losses and expenses of that group and to allow the insurer to achieve a reasonable profit.

Forms of Insurer Ownership

Type of Insurere --> Ownership--> Managed Stock Insurer --> Stockholders --> B of D, Stock Mutual --> policyholders--> B of D, policyholders Reciprocal Ins. Exchange--> Stockholders--> Attorney in fact, Subscribers chosed

Compare file-and-use rating laws with use-and-file laws

Under file-and-use laws, insurers must file rates with the state insurance department prior to their use, but the rates can be used immediately without specific approval. Use-and-file laws are a variation of the file-and-use law in which insurers file rates within a specified period of time after the rates are put into use.

What happens when insurance rates become inadequate due to destructive competition?

When insurance rates become inadequate, some insurers may not collect enough money to pay all of their insured's claims and may become insolvent. Others might lose so much profit that they might remove themselves from the market or stop writing new business all together. An insurance shortage can then develop and this causing individuals and organizations might not be able to receive the coverage they need.

What is the purpose for which a stock insurer is formed

formed for the purpose of making a profit for its owners

What is the role of a stock insurer's board of directors

has the authority to control the insurer's activity, creates and oversees corporate goals and objective and appoints a CEO to carry out the operations