General Insurance (7)

Sharing

A method of dealing with risk for a group of individual persons or businesses with the same or similar exposure to loss to share the losses that occur within that group. A reciprocal insurance exchange is a formal risk-sharing arrangement.

INDEMNITY (REIMBURSEMENT) (repeat)

A provision in an insurance policy that states that in the event of a loss, an insured or a beneficiary is permitted to collect only to the extent of the financial loss and is not allowed to gain financially because of the existence of an insurance contract. The purpose of insurance is to restore, not let the insured or a beneficiary profit from the loss.

WARRANTIES (repeat)

An absolutely true statement upon which the validity of the insurance policy depends. When breached, it can be grounds for voiding the policy or returning the premium. Because of such strict definition, statements made by applicants for life and health insurance policies are usually not considered warranties, except in cases of fraud.

IMPLIED agent authority

Authority that is not expressed or written into the contract, but which the agent is assumed to have in order to transact the business of insurance for the principal. Implied authority is incidental to and derives from express authority since not every detail of an agent's authority can be spelled out in the written contract.

AMBIGUITIES IN A CONTRACT OF ADHESION (repeat)

Because insurer writes contracts, ambiguity in the contract should be interpreted in favor of the insured.

Admitted vs. Nonadmitted Insurers (Authorized vs. Nonauthorized Insurers)

Before insurers may transact business in a specific state, they must apply for a license or Certificate of Authority from the state department of insurance and meet any financial (capital and surplus) requirements set down by the state. Insurers who meet these requirements and are approved are called ADMITTED or AUTHORIZED insurers. Those who do not meet the requirements or are not approved are called NONADMITTED or NONAUTHORIZED insurers. Most states have laws that prohibit unauthorized insurers to conduct business in the state, except through licensed excess or surplus brokers.

Avoidance

Eliminating exposure to a loss. For example, if a person wanted to avoid the risk of being killed in an airplane crash, he/she might choose never to fly in an airplane. Risk avoidance is effective, but seldom practical.

Contract of Adhesion

Prepared by one of the parties (insurer) and accepted or rejected by the other party (insured). "Take-it-or-leave-it" by insurer

REPRESENTATIONS/MISREPRESENTATIONS (repeat)

Representations are statements believed to be true to the best of one's knowledge, but they are not guaranteed to be true. ie. answers the insured gives to the questions on the insurance app. MISREPS--> untrue statements, can void contract MATERIAL MISREPS --> if discovered would alter the underwriting decision of the insurance company. (if intentional, would be considered fraud)

CONCEALMENT (repeat)

The legal term for the intentional withholding of information of a material fact that is crucial in making a decision. In insurance, concealment is the withholding of info by the applicant that will result in imprecise underwriting decision. --> May void policy

Private Insurance Company classifications

-Ownership -Authority to transact business -Location (domicile) -Marketing and distribution systems -Rating (financial strength)

Elements of Insurable Risk

1. Due to Chance: 2. Definite and Measurable: 3. Statistically Predictable: Insurers must be able to estimate the average frequency and severity of future losses and set appropriate premium rates. (In life and health insurance, the use of mortality tables and morbidity tables allows the insurer to project losses based on statistics) 4. Not catastrophic: Insurers need to be reasonably certain their losses will not exceed specific limits. That is why insurance policies usually exclude coverage for loss caused by war or nuclear events: There is no statistical data that allows for the development of rates that would be necessary to cover losses from events of this nature. 5. Randomly Selected and large loss exposure: There must be a sufficiently large pool of the insured that represents a random selection of risks in terms of age, gender, occupation, health, and economic status, and geographic location.

Contracts

4 parts: 1.AGREEMENT (offer and acceptance) - There must be a definite offer by one party, and the other party must accept this offer in its exact terms. In insurance, the applicant usually makes the OFFER when submitting the application. ACCEPTANCE takes place when an insurer's underwriter approves the application and issues a policy. 2. CONSIDERATION - Binding force in any contract. Consideration is something of value that each party gives to the other. The consideration on the part of the insured is the payment of the premium and the reps made in the application. The consideration on the part of the insurer is the promise to pay in the event of loss. 3. COMPETENT PARTIES - The PARTIES TO A CONTRACT must be capable of entering into a contract in the eyes of the law. Generally, this requires that both parties be of legal age, mentally competent to understand the contract, and not under the influence of drugs or alcohol. 4. LEGAL PURPOSES - The purpose of the contract must be legal and not against public policy. To ensure legal purpose of a Life Insurance policy, it must have both: INSURABLE INTEREST and CONSENT. A contract without legal purpose is considered void, and cannot be enforced by either party.

Reinsurancce

A contract under which one insurance company (the reinsurer) indemnifies another insurance company for part or all of its liabilities. The purpose of reinsurance is to protect insurers against catastrophic losses. The originating company that procures insurance on itself from another insurer is called the CEDING INSURER. The other insurer is called the ASSUMING INSURER.

Legal Interpretations Affecting Contracts

AMBIGUITIES IN A CONTRACT OF ADHESION - Because insurer writes contracts, ambiguity in the contract should be interpreted in favor of the insured. REASONABLE EXPECTATIONS - It is not always practical or necessary to state every direct or direct provision or coverage offered by an insurance policy. INDEMNITY (REIMBURSEMENT) - A provision in an insurance policy that states that in the event of a loss, an insured or a beneficiary is permitted to collect only to the extent of the financial loss and is not allowed to gain financially because of the existence of an insurance contract. The purpose of insurance is to restore, not let the insured or a beneficiary profit from the loss. UTMOST GOOD FAITH - Implies that there will be no fraud, misrepresentation or concealment between the parties. REPRESENTATIONS/MISREPRESENTATIONS - Representations are statements believed to be true to the best of one's knowledge, but they are not guaranteed to be true. ie. answers the insured gives to the questions on the insurance app. MISREPS--> untrue statements, can void contract MATERIAL MISREPS --> if discovered would alter the underwriting decision of the insurance company. (if intentional, would be considered fraud) WARRANTIES - An absolutely true statement upon which the validity of the insurance policy depends. When breached, it can be grounds for voiding the policy or returning the premium. Because of such strict definition, statements made by applicants for life and health insurance policies are usually not considered warranties, except in cases of fraud. CONCEALMENT - The legal term for the intentional withholding of information of a material fact that is crucial in making a decision. In insurance, concealment is the withholding of info by the applicant that will result in imprecise underwriting decision. --> May void policy FRAUD - The intentional misrep or intentional concealment of a material fact used to induce another party to make or refrain from making a contract, or to deceive or cheat a party. Fraud is grounds for voiding a contract. WAIVER AND ESTOPPEL - Waiver is the voluntary act of relinquishing a legal right, claim, or privilege. Estoppel is a legal process that can be used to prevent a party to a contract from re-asserting a right or privilege after that right or privilege has been waived. Estoppel is a legal consequence of a waiver.

Responsibilities to the Applicant/Insured

Although the agents act for the insurer, they are legally obligated to treat applicants and insureds in an ethical manner. Because an agent handles funds of the insureds and the insurer, he/she has FIDUCIARY RESPONSIBILITY. A FIDUCIARY is someone in a position of trust. More specifically, it is illegal for insurance producers to commingle premiums collected from applicants with their own personal funds. Market Conduct describes the way companies and producers should conduct their business. It is a type of Code of Ethics for producers. Producers must adhere to certain established procedures, and failure to comply will result in penalties. Some of the market conduct regulations include, but are not limited to the following: -Conflict of Interest -A request of a gift or loan as a condition to complete business -Supplying confidential information Producers are required to perform in a professional manner at all times. Professionalism can be defined as a person in an occupation requiring an advanced level of training, knowledge, or skill. Being professional means placing the public's interest above your own in all situations. Any deviation could result in a penalty.

Producer/Insurer Relationship

An agent (producer) will always be deemed to rep the insurer, not the insured. With regards to an insurance contract, any knowledge of the agent is presumed to be knowledge of the insurer. IF THE AGENT IS WORKING WITHIN THE CONDITIONS OF HIS/HER CONTRACT, THE COMPANY IS FULLY RESPONSIBLE. The agent is responsible to the insurer when completing applications for insurance, submitting the application to the insurer for underwriting, and when issued, delivering the policy to the policyowner and explaining the contract. In addition, if the insured submits payment to the agent, it is the same as submitting a payment to the insurer.

Producers and General Rules of Agency

An agent/producer is an individual licensed to sell, solicit, or negotiate insurance contracts on behalf of the principal (insurer). The LAW OF AGENCY defines the relationship between the principal and the agent/producer: the acts of the agent/producer within the scope of authority are deemed to be the acts of the insurer. In this relationship, it is a given that: -An agent represents the insurer, not the insured -Any knowledge of the agent is presumed to be knowledge of the insurer -If the agent is working within the conditions of his/her contract, the insurer is fully responsible -When the insured submits payment to the agent, it is the same as submitting a payment to the insurer The agent is responsible for accurately completing applications for insurance; submitting the application to the insurer for underwriting; and delivering the policy to the policyowner.

Foreign Insurer

An insurance company that is incorporated in another state or territorial possession. CA chartered company would be a foreign company within the state of NY

Domestic Insurer

An insurance company that is incorporated in this state (domicile). In most cases, the company's home office is in the state in which it was formed - the company's domicile. For instance, a company chartered in Pennslyvania would be considered a PA domestic company.

Alien Insurer

An insurance company that is incorporated outside the United States.

Risk Retention Groups

An insurance organization typically not regulated as a company by state authorities is a RISK RETENTION GROUP, most often addressing a commercial casualty concern. These groups develop rates, collect premiums, and pay claims to accepted members. Typically, municipalities, hospitals, and manufacturers of hazardous products are forced to turn to such groups to seek reimbursement for claims that might occur out of their daily operations which have the potential to bankrupt their business.

Fraternal Benefit Society

An organization formed to provide insurance benefits for members of an affiliated lodge, religious organization, or fraternal organization with a representative form of government. Since fraternals sell only to their members and are considered charitable institutions, they are not subject to all of the regulations that apply to the insurers that offer coverage to the public at large.

Insurer

Any person or company engaged as the principal party in the business of entering into insurance contracts. There are several classifications of insurers depending on the type of ownership, location of incorporation, and other characteristics.

Peril

Causes of loss insured against in an insurance policy

Hazards

Conditions or situations that increase the probability of an insured loss occurring. -Physical, moral, morale

Producer Associations

Created for agents or producers within the same division of the insurance industry. There are such associations for life agents, property casualty agents, adjusters, managing general agents, health insurance providers, fraternal field managers associations, etc. Producer associations gather to share research, and statistical info for their area of expertise.

Non Participating (stock) policy

Does not pay dividends to policyowners; however, taxable dividends are paid to stockholders.

Fair Credit Reporting Act

Established procedures that consumer-reporting agencies must follow in order to ensure that records are confidential, accurate, relevant, and properly used. The law also PROTECTS CONSUMERS against the circulation of inaccurate or obsolete information. 2 types of Reports for legitimate business purpose, including insurance underwriting, employment screening, and credit transactions: CONSUMER REPORTS - Include written and/or oral information regarding a consumer's credit, character, reputation, or habits collected by a reporting agency from employment records, credit reports, and other public sources. INVESTIGATIVE CONSUMER REPORTS - Provide info about consumer's character, reputation, and habits. PRIMARY DIFFERENCE is that the info is obtained through an investigation and interviews with associates, friends, and neighbors of the consumer. Unlike consumer reports, these reports cannot be made unless the consumer is advised in writing about the report within 3 days of the date the report was requested. Consumer then has the right to request additional info, insurer has 5 days to provide consumer with additional info Violations - penalities: Willfully/knowingly obtains info about consumer from cons. reporting under false pretenses - up to 2 yrs imprisonment Unknowingly- liable in the amount equal to the loss to the consumer Willfully violates enough ton constitutea general pattern or business practice- up to $2500 penalty Consumer has the right to know what was in the report If policy is declines because of info in report, consumer must be advised and provided with reporting agency info. Consumer has right to know id of anyone who has received report in past year. Consumer has right to challenge info, reporting agency must reinvestigate and amend if necessary, and send corrected reports to all they had distributed to whom in the past 2 yrs. Prohibited info if life insurance policy or credit transaction less than 150,000: bankruptcy 10+ yrs old, arrest or convictions records, civil suits, or any other negative info over 7 yrs old. Negative info --> info regarding customer's delinquencies, late payments, insolvency, or any other form of default.

Life and Health Insurance Guaranty Association

Formed to protect policyowners, insureds, beneficiaries, and anyone entitled to payment under an insurance policy from the incompetence and insolvency of insurers. The association will pay covered claims up to a certain limits set by state law. The association is usually funded by its members. All authorized insurers, which are required to be members of the Association, contribute to a fund to provide for the payment of claims for insolvent insurers. It is UNFAIR TRADE PRACTICE to make any statement that an insurer's policies are guaranteed by the existence of the IGA. Authorized insurers in this state must disclose to their policyholders the fact that insurance company contracts are not guaranteed by the state guaranty association.

UTMOST GOOD FAITH (repeat)

Implies that there will be no fraud, misrepresentation or concealment between the parties.

Insurer as Principal

In applying the LAW OF AGENCY, the insurer is the PRINCIPAL. The acts of an agent or producer who is acting within the scope of his or her authority are the acts of the insurer.

Note on Domestic, Foreign and Alien Insurers

Insurance companies are classified according to the LOCATION OF INCORPORATION (domicile). Regardless of where an insurance company is incorporated, it must obtain a CERTIFICATE OF AUTHORITY before transacting insurance within the state.

Aleatory Contract

Insurance contracts are aleatory. An exchange of unequal amounts or values. Premium paid by insured is small in relation to the amount that will be paid by the insurer in the event of a loss.

Surplus Lines

Insurance that is not available in the regular market place from admitted insurers is referred to as Surplus Lines. It usually involves insurance for high risk individuals and is placed with nonadmitted insurers who specialize in offering insurance to the high risk market.

Life Insurance

Insures against the financial loss caused by the premature death of the insured.

Casualty Insurance

Insures against the loss and/or property damage of property and resulting liabilities.

Health Insurance

Insures against the medical expenses and/or loss of income caused by the insured's sickness or accidental injury.

REASONABLE EXPECTATIONS (repeat)

It is not always practical or necessary to state every direct or direct provision or coverage offered by an insurance policy.

Private vs. Govt Insurers

Major difference is that the government programs are funded with taxes and serve national and state purposes, while private policies are funded by premiums.

Purchasing Groups

Means any group which main purpose is the purchase of liability insurance on a group basis to cover their similar or related liability exposure. The group is composed of members whose businesses or activities are similar or related with respect to the liability exposure.

NAIC

National Association of Insurance Commissioners - an organization composed of insurance commissioners from all 50 states, DC, and 4 US territories. Resolves insurance regulatory problems. They are active in the formation and recommendation of model legislation and regulations designed to bring uniformity from state to state and simplify the marketing of insurance.

NCOIL

National Conference of Insurance Legislators- created to help legislators make informed decisions on insurance issues affecting their constituents. Opposes federal encroachment of state authority to oversee the insurance industry. Many members of NCOIL, either chair or are members of committees responsible for insurance legislation. Goals: -Educate state legislators on current and perennial insurance issues - Help State legislators from different states work effectively with each other -Improve the quality of insurance regulation -Assert the prerogative of legislators in making state policy concerning insurance -Speak on Congressional initiatives that attempt to encroach upon state primacy in overseeing insurance.

Unilateral Contract

Only one of the parties to the contract is legally bound to do anything. The insured makes no legally binding promises. An insurer is legally bound to pay losses covered by policy in force.

Speculative Risk

Opportunity for either loss or gain.

Stock Companies

Owned by stockholders who provide the capital necessary to establish and operate the insurance company and who share in any profits or losses. Officers are elected by stockholders and manage stock insurance companies. Traditionally, stock companies issue NONPARTICIPATING policies, in which policyowners do not share in profits or losses.

Mutual Companies

Owned by the policyowners and issue PARTICIPATING policies. With participating policies, policyowners are entitled to dividends, which, in case of mutual companies, are a return of excess premiums and are therefore nontaxable. Dividends are generated when the premiums and the earnings combined exceed the actual costs of providing coverage, creating a surplus. Dividends are not guaranteed. What happens if there is a deficit?

Loss

Reduction, decrease, or disappearance in value of the person or property insured in a policy, caused by a named peril. Insurance provides a mean to transfer loss.

Conditional Contract

Requires that certain conditions must be met by the policyowner and the company in order for the contract to be executed, and before each party fulfills its obligations. For example, the insured must pay the premium and provide proof of loss in order for the insurer to cover a claim.

Self-Insurers

Self-insuring is when a person or entity, as an alternative to the purchase of insurance from an insurance company, develops a formal program identifying, evaluating and funding its losses. It is frequently used for workers compensation where losses are fairly predictable and states have established regulations for self-insurance. Self-insurers frequently structure their programs to only retain losses up to a certain specified limit and purchase insurance to cover loss above that level.

Reduction

Since we usually cannot avoid risk entirely, we often attempt to lessen the possibility or severity of a loss. Reduction would include actions such as installing smoke detectors, having an annual physical, or making lifestyle changes.

Pure Risk

Situations that can only result in a loss or no change.

Law of Large Numbers

States that the larger number of people with a similar exposure of loss, the more predictable actual losses will be. The basis of insurance --> sharing the risk among a large pool of people with similar exposure to loss (homogeneous group) This law forms the basis for statistical prediction of loss upon which insurance rates are calculated.

Authority and Powers of Producers

The agency contract details the authority an agent has within his/her/ company. Contractually, only those actions for which the agent has been authorized can bind the principal. In reality, the agent's authority is much broader. 3 types of agent authority: EXPRESS, IMPLIED, APPARENT

APPARENT agent authority

The appearance or the assumption of authority based on the actions, words or deeds of the principal or because of circumstances the principal created. For example, when an insurer furnishes an agent with a rate book, application forms, and sales literature, the insurer cannot later deny that such a relationship existed.

EXPRESS agent authority

The authority a principal intends to grant to an agent by means of the agent's contract. It is the authority that is written in the contract.

Financial Status ( Independent Rating Services)

The financial strength and stability of an insurance company are two vitally important factors to potential insureds. The financial strength of an insurance company is based on prior claims experience, investment earnings, level of reserves (amount of money kept in a separate account to cover debts to policyholders), and management, to name a few. Guides to insurance companies' financial integrity are published regularly by the following independent rating services: -AM Best -Fitch -Standard and Poor's -Moody's -Weiss

Financial Status ( Independent Rating Services )

The financial strength and stability of an insurance company are two vitally important factors to potential insureds. The financial strength of an insurance company is based on prior claims experience, investment earnings, level of reserves (amount of money kept in a separate account to cover debts to policyholders), and management, to name a few. Guides to insurance companies' financial integrity are published regularly by the following various independent rating services: -AM Best -Fitch -Standard and Poor's -Moody's -Weiss

Adverse Selection

The insuring of risks that are more prone to losses than the average risk. Poorer risks tend to seek insurance or file claims to a greater extend than the better risks. To protect themselves from adverse selection, insurance companies have an option to refuse or restrict coverage for bad risks, or charge them a higher rate for insurance coverage.

FRAUD (repeat)

The intentional misrep or intentional concealment of a material fact used to induce another party to make or refrain from making a contract, or to deceive or cheat a party. Fraud is grounds for voiding a contract.

Transfer

The most effective way to handle risk is to TRANSFER it so that the loss is borne by another party. Insurance is the most common method of transferring risk from an individual or group to an insurance company. Though the purchasing of insurance will not eliminate the risk of death or illness, it relieves the insured of the financial losses these risks bring. Several other ways to transfer risk exist, such as to hold harmless agreements and other contractual agreements, but the safest and most common is to purchase insurance coverage.

Retention

The planned assumption of risk by an insured through the use of deductibles, co-payments, or self-insurance. It is also known as self-insurance when the insured accepts the responsibility for the loss before the insurance company pays. The purpose of retention is to: 1. To reduce expenses and improve cash flow 2. To increase control of claim reserving and claims settlements 3. To fund for losses that cannot be insured

Insurance Transfers

The risk of loss from an individual or business entity to an insurance company, which in turn spreads the costs of unexpected losses to many individuals. If there was no insurance mechanism, the cost of a lost would be borne solely by the individual who suffered the loss.

Marketing (Distribution) Systems - Types of Marketing Arrangements

Through agents or direct solicitation to customers. Independent Agency System/ American Agency System - 1 independent agent represents several companies, nonexclusive, commissions on personal sales, business renewal with any company Exclusive Agency System/Captive Agents - 1 agent reps 1 company, exclusive, commissions on personal sales, renewals can only be placed with the appointing insurer General Agency System - General Agent-entrepreneur reps 1 company, Exclusive, Compensation and Commissions, Appoints subagents Managerial System - Branch manager (supervises agents), Salaried, Agents can be insurer's employees or independent contractors Direct Response Marketing System - No agents, Company advertises directly to consumers (through mail, internet, tv, other mass marketing), Consumers apply directly to the company

Fraud and False Statements

UNLAWFUL INSURANCE FRAUD - any person engaged in the business of insurance to willfully, and with the intent to deceive, make any oral or written statement that are either false or omit material facts. This includes information and statements made on an app for insurance, renewal of a policy, claims for payment or benefits, premiums paid, and financial condition of an insurer. Consequences: anyone engaged in business of insurance whose activities affect Interstate commerce, material false statements - up to 10 yrs prison or/and fine, up to 15 yrs if activity jeopardized the security of accompanied insurer Same for embezzling funds by an agent, officer, director may be reduced to 1 yr if less that 5000 in embezzlement.

Variable Products

Variable life insurance and variable annuities are dually regulated by State and Fed govt. Due to the element of investment risk, the fed govt says that variable contracts are securities and are thus regulated by SEC and FINRA (Federal Industry Regulatory Authority) Also regulated by the Insurance Department as an insurance product. Agents selling life insurance must be registered with FINRA, and licensed by state.

WAIVER AND ESTOPPEL (repeat)

Waiver is the voluntary act of relinquishing a legal right, claim, or privilege. Estoppel is a legal process that can be used to prevent a party to a contract from re-asserting a right or privilege after that right or privilege has been waived. Estoppel is a legal consequence of a waiver.

Risk

the uncertainty or chance of a loss occurring. The two types: Pure and Speculative. Pure risk is the only insurable risk.