Insurance 1.1 - 1.7

An Insured

the person or entity that is covered by the Insurer, which covers losses due to loss of life, health, property, or liability

An Owner

the person responsible for paying the policy's premium; this person is not necessarily the insured under the policy, but has various rights that are specified in the contract

Insurance Companies

(known as Insurers or Carriers) manufacture and sell insurance coverage in the form of insurance policies or contracts of insurance

If a person engaged in the business of insurance, whose activities affect interstate commerce, willfully embezzles, misappropriates funds or property knowingly, and with the intent to deceive, makes a false material statement, or purposely overstates the security of an insurer, the following penalties will apply:

- A fine of no more than $50,000, imprisonment for up to 10 years, or both - If the violation jeopardized the safety and soundness of an insurer, and was a significant cause of the insurer being placed in conservation, rehabilitation, or liquidation by an appropriate court, imprisonment can be for up to 15 years - If the amount embezzled or misappropriated does not exceed $5,000, violators will be fined up to $50,000, imprisoned for up to 1 year, or both If a person uses threats, force, or attempts to impede/obstruct the administration of the law during any proceeding involving the business of insurance before any insurance regulatory official, they will be fined up to $50,000, imprisoned up to 10 years, or both. Any individual who has been convicted of a felony involving dishonesty or a breach of trust, who then willfully engages or permits an individual to engage in the business of insurance, and whose activities affect interstate commerce, will be fined up to $50,000, imprisoned up to 5 years, or both.

Insurer Management

- Executives - Oversee the operation of the business - Actuarial Department - Gather and interpret statistical information used in rate making. An actuary determines the probability of loss and sets premium rates. - Underwriting Department - Responsible for the selection of risks (persons or property) to insure and rating that determines policy premiums - Marketing/Sales Department - Responsible for advertising and selling - Claims Department - Assists the policyholder, insured, or beneficiary in the event of a loss and processes, and pays the amount of the claim in a timely manner, based upon the contractual provisions and the amount insured

There are several "red flags" agents are trained to recognize, one in particular is a client buying a policy simply to hide or move illegal money. Practices that are outside the norm for life insurance transactions include:

- Paying for an entire policy up front with cash - Early cancellation of the policy, regardless of cancellation fees or surrender charges - The heavy use of third parties for policy transactions - Strong reliance on wire or electronic fund transfers to foreign accounts Agents/brokers are required to report any activity they believe, or even have reason to suspect, is an effort to launder money. Depending upon a producer's involvement in the transaction, failure to comply can result in dismissal and civil, or possibly even criminal, prosecution.

The Financial Privacy rule requires "financial institutions," which include insurers, to provide each consumer with a privacy notice at the time the consumer relationship is established, and annually thereafter. In insurance, the consumer relationship is created when the policy is issued to the client. Application information remains confidential and cannot be used for other purposes without prior notice to the consumer. The privacy notice must explain:

- The information collected about the consumer - Where that information is shared - How that information is used - How that information is protected The notice must also identify the consumer's right to opt out of the information being shared with unaffiliated parties as part of the provisions of the Fair Credit Reporting Act. Should the financial institutions privacy policy change at any point in time, the consumer must be notified again for acceptance. Each time the privacy notice is re-established, the consumer has the right to opt out again.

Limited Access to Information -

A consumer reporting agency may not provide a credit report to any party that lacks a permissible purpose, such as the evaluation of an application for a loan, credit, service, or employment. Permissible purposes also include several business and legal uses.

Correct or Delete Inaccurate Information -

A consumer reporting agency must correct or, if necessary, delete from a credit file the information that is found to be inaccurate or can no longer be verified. The consumer reporting agency is not required to remove accurate data from a file unless it is outdated. Adverse information that is more than 7 years old (10 years for bankruptcies) must be removed from the file.

Broker -

A licensed individual who negotiates insurance contracts with insurers on behalf of the applicant. A broker represents the applicant or insured's interests, not the insurer, and does not have legal authority to bind the insurer. Broker licenses are not applicable in all states.

Mutual Insurance Company

A mutual company is owned by policyholders (who may be referred to as members). A Board of Trustees or Directors is elected by policyholders. The directors and officers put in place a management team to carry out the company's mission. Policyholders may receive non-taxable dividends as a return of any divisible surplus when and if declared by the directors. Traditionally, mutual insurers issue Participating policies, meaning that policyholders are entitled to receive any dividends. The dividends represent the favorable experience of the company and result from excess investment earnings, favorable mortality, and expense savings. Dividends can be paid in cash, used to reduce premiums, left to accumulate at interest, and used to purchase paid-up additional insurance. Dividends are not guaranteed.

Producer (agent) -

A person or agency appointed by an insurance company to represent it and to sell policies on its behalf. A producer acts with one or more of the following three types of authority: 1. Express - Authority that is written into the producer's contract. An example would be the producer's binding authority if written in the contract. A producer's contract may also express what the producer may not do, such as creating their own advertisements. 2. Implied - Authority the public assumes the producer has. An example would be the business activities of providing quotes, completing applications, and accepting premiums on behalf of the insurer. 3. Apparent - Authority created when the producer exceeds the authority expressed in the agency contract. This occurs when the insurer takes no action to counter the public impression that such authority exists. An example would be the producer's issuance of a binder when, in fact, the producer has not been granted the authority to issue binders.

Direct Writing System -

A producer or agent is an employee of the insurer, and the insurer owns the accounts. The agent may be paid a salary, salary and a bonus, or commission.

Reciprocal Insurance Company

A reciprocal insurance company is a group-owned insurer whose main activity is risk sharing. A reciprocal insurer is unincorporated, and is formed by individuals, firms, and business corporations that exchange insurance on one another. Each member is known as a subscriber, and each subscriber assumes a part of the risk of all other subscribers. If premiums collected are insufficient to pay losses, an assessment of additional premium can be made. The exchange of insurance is affected through an Attorney-In-Fact, who is not required to be licensed in insurance.

Stock Insurance Company

A stock company is owned by stockholders or shareholders. Directors and officers, which are elected by stockholders, put in place a management team to carry out the company's mission. Stockholders may receive taxable corporate dividends as a share of the company's profit when and if declared by the directors. However, dividends are not guaranteed. Traditionally, stock insurers issue Non-Participating policies, meaning that the policyholder is not entitled to receive any dividends.

Inaccuracies -

Agency must forward to applicant inaccurate information given out within previous 2 years.

Career Agency System -

Agents are recruited, trained and supervised by either a managing employee or General Agent who is contracted with the insurance company

Independent Agency -

An agent or agency enters into selling agreements with more than 1 insurer; an unlimited number of insurers may be represented. The agency retains ownership of the business written. The independent contractors are paid a commission and must cover the cost of agency operations.

Alien Insurer

An insurer organized under the laws of any jurisdiction outside the United States, whether or not it is admitted to do business in this state. Example: An insurer incorporated in Ontario, Canada, is considered alien to New York.

Foreign Insurer

An insurer organized under the laws of any other state, possession, territory, or the District of Columbia of the United States, whether or not it is admitted to do business in this state. Example: An insurer incorporated in New York is considered foreign to Kansas.

Domestic Insurer

An insurer organized under the laws of this state, whether or not it is admitted to do business in this state. Example: An insurer incorporated in New York is considered domestic to New York.

Consent to Work (1033 Waiver)

Applicants who have been convicted of a felony must apply for Consent to Work (1033 Waiver) in the business of insurance—prior to applying for an insurance license. Producer must apply for this consent in their state of residence. Officers and employees must apply for the consent in the state where their home office is located. Convicted felons must apply for consent in order to discover if they are permitted in, or prohibited from, the insurance business.

Claims Department -

Assists the policyholder, insured, or beneficiary in the event of a loss and processes, and pays the amount of the claim in a timely manner, based upon the contractual provisions and the amount insured

Apparent -

Authority created when the producer exceeds the authority expressed in the agency contract. This occurs when the insurer takes no action to counter the public impression that such authority exists. An example would be the producer's issuance of a binder when, in fact, the producer has not been granted the authority to issue binders.

Express -

Authority that is written into the producer's contract. An example would be the producer's binding authority if written in the contract. A producer's contract may also express what the producer may not do, such as creating their own advertisements.

Implied -

Authority the public assumes the producer has. An example would be the business activities of providing quotes, completing applications, and accepting premiums on behalf of the insurer.

Disclosure upon Request -

Consumer reporting agencies must provide the information on file if requested.

Applicant Challenge -

Credit reporting agency must reinvestigate within 6 months, if applicant challenges accuracy.

Insurer Distribution Models

Exclusive or Captive Agency System - The insured interacts with the insurer through an exclusive or captive agent, representing only one company, or a group of companies that have common ownership. The insurer retains ownership rights to the business written by the agent and may or may not provide the agent with office and agency support services. The agent is an employee or a commissioned independent contractor. Direct Writing System - A producer or agent is an employee of the insurer, and the insurer owns the accounts. The agent may be paid a salary, salary and a bonus, or commission. Independent Agency - An agent or agency enters into selling agreements with more than 1 insurer; an unlimited number of insurers may be represented. The agency retains ownership of the business written. The independent contractors are paid a commission and must cover the cost of agency operations. Career Agency System - Agents are recruited, trained and supervised by either a managing employee or General Agent who is contracted with the insurance company Personal Producing General Agent - The agent sells insurance for carriers it is contracted with and maintains its own office and staff. These agents do not recruit career agents. Direct Mail or Direct Response Company - Insurers sell insurance policies directly to the public via licensed employees or contractors. They use a marketing system that utilizes mass media, such as direct mail, newspapers, magazines, radio, television, internet, web sites, call centers, and vending machines. Mass Marketing - This type of marketing uses the direct response or direct mail method to target a specific type of insurance to a large group of individuals, such as the American Association of Retired People (AARP). The insurer may benefit through reductions in marketing costs and underwriting expenses may be lower when coverage is offered to a limited population. Associations may receive some financial benefit from allowing an insurer to market directly to its membership.

Fraud and False Statements (Fraudulent Insurance Act)

Federal laws prohibit the commissions of fraud, which always involves a false statement and deceit; it can be either a criminal or civil crime. In 2001, the NAIC adopted model legislation for the prevention and enforcement of insurance fraud. Subsequently, each of the states enacted its own Fraudulent Insurance Act. A fraudulent act involves a misstatement of material fact by a person who knows or believes that statement to be false. The statement is made to another person who relies on its accuracy to act or make a decision and is subsequently harmed by relying on the deliberately false statement. State fraudulent insurance acts do not modify the privacy of any individual; they protect producers, brokers, and insurers in the event fraudulent information is provided by consumers. Insurance applications and claim forms must contain a disclosure about how false statements and fraud will be treated by the insurer. A sample warning is, "Any person who knowingly presents false or fraudulent information on an insurance application or claim for the payment of a loss is guilty of a crime and may be subject to fines and confinement in state prison."

Penalties -

Fines and possible prison time.

Fraternal Benefit Societies

Fraternal benefit societies are primarily social organizations that engage in charitable and benevolent activities that can provide life and health insurance to their members. Membership typically consists of members of a given faith, lodge, order, or society. They are usually organized on a non-profit basis, and fraternal insurance producers represent the fraternal insurer and sell insurance to fraternal members.

Actuarial Department -

Gather and interpret statistical information used in rate making. An actuary determines the probability of loss and sets premium rates.

Investigation of Disputed Information -

If a consumer's file contains inaccurate information, the agency must promptly investigate the matter with the source that provided the information. If the investigation fails to resolve the dispute, a statement may be added to the credit file explaining the matter.

Consent Withdrawal -

If conditions of consent are not continually met, the consent may be withdrawn.

Reciprocity -

If consent is granted by any state, other states must allow the applicant to work in their states as well.

Insurance Regulation at the Federal Level

In the aftermath of the Supreme Court decision in U.S. v. South-Eastern Underwriters (1944), the McCarran-Ferguson Act of 1945 established that the federal government will not regulate the business of insurance in areas which the states have historically had the authority to do so (such as producer and company licensing) unless the states fail to cooperate. Congress created federal agencies to provide regulatory oversight impacting insurance practices.

Financial Rating Services

Independent financial rating services evaluate and rate the claims-paying ability and financial stability of insurance companies. These firms assign letter ratings that indicate the financial strength of each company, which may be based on both public and nonpublic data. The higher the rating, the higher likelihood that the insurer has the ability to pay claims. The lower the rating, the less likely the insurer is to be able to pay claims. The ratings are made available to the public, though insurers may purchase reprints of their ratings for use as marketing tools. Producers are responsible for placing business with insurers that are financially sound. Examples of rating services include: A.M. Best Company, Standard & Poor's, Moody's Investment Services, Weiss Insurance Rating, and Fitch Ratings.

Risk Sharing Plan

Insurers agree to apportion among themselves those risks that are unable to obtain insurance through normal channels.

Direct Mail or Direct Response Company -

Insurers sell insurance policies directly to the public via licensed employees or contractors. They use a marketing system that utilizes mass media, such as direct mail, newspapers, magazines, radio, television, internet, web sites, call centers, and vending machines.

Private vs. Government Insurers

Most insurance is written through private insurers. However, there are instances where government-based insurers step in to offer an insurance alternative when private insurers are unable to provide protection. This is usually related to the catastrophic nature of the risk, capacity to handle the risk, and lack of desire to engage in a line of insurance where experience to evaluate necessary premium intake to offset potential loss is lacking.

Executives -

Oversee the operation of the business

Producer's Responsibilities to the Insurer:

Producers have a fiduciary duty to the insurer in all respects. A fiduciary is a legal or ethical relationship of trust between two or more parties. Typically, a fiduciary prudently takes care of money for another person, for instance, especially when a producer handles premiums for insurance policies or applications. Producers must keep premiums in a trust account that is separate from other funds and forward the money to the insurer promptly; there must not be any commingling of funds. Producers must report any material facts that may affect underwriting and they are responsible for soliciting, negotiating, selling, and cancelling the insurance policies with the insurer. Producers have a duty to only recommend the purchase of policies that are suitable to their clients. The producer is responsible to the insurance applicant to promptly forward premiums to the insurer, recommend the best protection, gain knowledge of the applicant's insurance needs and current insurance coverage, and serve the applicant's best interests.

Producer's Responsibilities to Insurance Applicant or Insured:

Producers must forward premiums to the insurer in a timely manner. They must seek and gain knowledge of the applicant's insurance needs in order to ensure they are recommending suitable products for them. Producers must review and evaluate the applicant's current insurance coverage, limits, and risks, and they must serve the best interests of the applicant or insured, even though they represent the insurer. Producers must recommend coverage that best protects the insured from possible loss and NOT just the products that would be most profitable from the perspective of the producer. Life and health producers do not issue contracts or binders for life or disability insurance and should not imply that coverage is in effect simply because a person submits an application and pays the first premium.

Domicile -

Refers to the jurisdiction (i.e., state or country) where an insurer is formed or incorporated. The domicile does not impact whether an insurer may be admitted to do business in this State. The domicile does not impact whether an insurer may be admitted to do business in this State. Surplus (Excess) Lines insurance can be placed through non-admitted carriers

Admitted vs. Non-admitted -

Refers to whether or not an insurer is approved or authorized to write business in this State.

Facultative -

Reinsurance agreement that allows the reinsurance company an opportunity to reject coverage for individual risks, or price them higher due to their substandard (higher risk) nature.

Treaty -

Reinsurance agreement that automatically accepts all new risks presented by the ceding insurer (the company seeking or requesting the reinsurance from the reinsurer).

Disallowed Information -

Report must not include lawsuits over 7 years old or bankruptcies more than 10 years old.

Joint Underwriting Association or Joint Reinsurance Pool

Requires insurers writing specific coverage lines in a given state to assume their share of profits/losses of the total voluntary market premiums written in that state.

Marketing/Sales Department -

Responsible for advertising and selling

Underwriting Department -

Responsible for the selection of risks (persons or property) to insure and rating that determines policy premiums

Risk Retention Groups (RRG)

Risk Retention Groups are group-owned insurers that primarily assume and spread the liability-related risks of its members. They are owned by their policyholders, and are licensed in at least one state. However, they may insure members of the group in other states. Groups must be made up of a large number of homogeneous or similar units. Membership is limited to risks with similar liability exposures such as theme parks, go-cart tracks, or water slides. They must have sufficient liquid assets to meet loss obligations. Each member assumes a portion of the risks insured.

Self-Insurers

Self-insurers assume all of the financial risk faced without transferring that risk to an insurer. Rather than paying premiums to a third party the self-insurer sets aside funds in an amount equal to or greater than the expected losses. If the losses are less than what is reserved to pay claims, it is a gain, otherwise, losses in excess of the reserve will require additional funding perhaps from on-going operation revenues. This is generally an option only for large companies who may limit their risk by only self-insuring up to a certain dollar amount of risk and then acquiring insurance for dollar amounts in excess of that amount.

Fair Credit Reporting Act (15 USC 1681-1681d)

The Fair Credit Reporting Act protects consumer privacy and protects the public from overly intrusive information collection practices. It ensures data collected is confidential, accurate, relevant and used for a proper and specific purpose. When an application is taken, it must inform the applicant a credit report (from a consumer reporting agency) can be obtained. The purpose of this is to determine the financial and moral status of an applicant (for variety of purposes such as employment screening, insurance underwriting or loan approvals). An applicant has the right to review the report.

Personal Producing General Agent -

The agent sells insurance for carriers it is contracted with and maintains its own office and staff. These agents do not recruit career agents.

Insurance Regulation at the State Level

The insurance industry is regulated primarily at the state level. The legislative branch writes and passes state insurance laws, or statutes, to protect the insuring public. The judicial branch is responsible for interpreting and determining the constitutionality of the statutes. The role of a state's executive branch is to enforce the existing statutes that have been put in place. The Commissioner, Director, or Superintendent of Insurance is typically appointed (or in some jurisdictions elected) by the Governor, and the Commissioner has the power to issue rules and regulations to help enforce these statutes.

Exclusive or Captive Agency System -

The insured interacts with the insurer through an exclusive or captive agent, representing only one company, or a group of companies that have common ownership. The insurer retains ownership rights to the business written by the agent and may or may not provide the agent with office and agency support services. The agent is an employee or a commissioned independent contractor.

Violent Crime Control and Law Enforcement Act of 1994 (18 USC 1033, 1034)

The largest crime bill in U.S. history expands funding to federal agencies such as the FBI, DEA, and INS and includes provisions that address, among other topics, domestic abuse and firearms, gang crimes, immigration, registration of sexually violent offenders, victims of crime, and fraud. The Act made it a felony for a person to engage in the business of insurance after being convicted of a state or federal felony crime involving dishonesty or breach of trust. Violations include willfully embezzling money, knowingly making false entries in any book, report or statement of the business, and threatening or impeding proper administration of the law in any proceeding involving the business of insurance.

Law of Agency -

The relationship of a person, called the agent or producer, who acts on behalf of another person, company, or government, known as the principal. The principal is responsible for the acts of the agent, and the agent's acts bind the principal. An act of an agent is the act of the principal.

Insurer (principal) -

The source of authority the producer must allow. The insurer appoints the producer to act on its behalf in transacting the business of insurance. It is responsible for all acts of its producers when a producer is acting within the scope of their authority. A producer may be personally liable when their actions exceed the authority of their contract.

Gramm-Leach-Bliley Act (the Financial Services Modernization Act of 1999)

This act repealed parts of the Glass-Steagall Act of 1933 and allowed the merger of banks, securities companies, and insurance companies. It also established the Financial Privacy Rule and Safeguards Rule for the protection of consumers' privacy.

Mass Marketing -

This type of marketing uses the direct response or direct mail method to target a specific type of insurance to a large group of individuals, such as the American Association of Retired People (AARP). The insurer may benefit through reductions in marketing costs and underwriting expenses may be lower when coverage is offered to a limited population. Associations may receive some financial benefit from allowing an insurer to market directly to its membership.

Types of Reinsurance Agreements

Treaty - Reinsurance agreement that automatically accepts all new risks presented by the ceding insurer (the company seeking or requesting the reinsurance from the reinsurer). Facultative - Reinsurance agreement that allows the reinsurance company an opportunity to reject coverage for individual risks, or price them higher due to their substandard (higher risk) nature.

USA PATRIOT Act and Anti-Money Laundering (AML)

With the increase of drug trafficking and acts of terrorism, the desire and demand for laundered money has also increased. As of May 2006, insurance companies have been required to provide anti-money laundering training to their producers. Brokers and agents are required to undergo training as insurance products are now being used to give a legitimate appearance to money financed by and for illegal activities. These new requirements and standards were necessitated by the USA PATRIOT Act. This act specified which financial institutions would be required to institute AML training programs, including insurance companies. The act specified which insurance products require anti-money laundering training and how to respond to suspected laundering activity. It also helped expand the definition of money laundering to include the money's ultimate purpose, not just its origin. The insurance products being used are mostly single premium permanent life insurance and annuity products, as they generate cash value.

Lloyd's of London

___________________ is not an insurance company, but consists of groups of underwriters called Syndicates, each of which specializes in insuring a particular type of risk. _____________ provides a meeting place and clerical services for syndicate members who actually transact the business of insurance. Members are individually liable for each risk they assume, and coverage provided is underwritten by a syndicate manager, such as an attorney-in-fact or individual proprietor.

Residual markets

are a last resort private coverage source for businesses and individuals who have been rejected by the voluntary insurance market. Coverage is typically written as Workers' Compensation, personal auto liability or property insurance on real property.

Reinsurance companies

are insurance companies that operate to accept all or a portion of the financial risk of loss from the primary (or "ceding") insurance company. The risk of loss is shared with one or more insurance companies. All contractual obligations are on the original (primary) company and consumers have no direct contact with reinsurance companies. ___________________ is what makes insurance affordable. No single insurance company is exposed to 100% of the losses it insures. When claims are paid by the insurer to the consumer, the actual source of the funds may come from both the insurer and their reinsurer but the consumer will not know how much came from each.

Breach of Trust is

based on fiduciary relationship of parties and the wrongful acts violating the relationship.

Insurance Agencies

captive or independent organizations that recruit, contract with, train, and support insurance producers

The National Association of Insurance Commissioners (NAIC)

consists of all state and territorial insurance commissioners or regulators. It provides resources, research, legislative and regulatory recommendations and interpretations for state insurance regulators. It also promotes uniformity among states. Members may accept or reject recommendations. The NAIC has no legal authority to enact or enforce insurance laws.

Surplus Lines Insurance

finds coverage when insurance cannot be obtained from admitted insurers. However, it cannot be utilized solely to receive lower cost coverage than would be available from an admitted carrier. - Each State regulates the procurement of Surplus Lines insurance in its State. - Can be placed through non-admitted carriers. Non-admitted business must be transacted through a Surplus Lines Broker or Producer.

A Non-Admitted (Unauthorized) insurer

has either applied for authorization to do business in this State and was declined or they have not applied. They do not have a Certificate of Authority to do business in the State

An Admitted (Authorized) insurer

is authorized by this State's Commissioner of Insurance to do business in this State and has received a Certificate of Authority to do business in this State

Insurance Producers

licensed individuals representing and appointed by an insurance company when transacting insurance business

Dishonesty refers to

misrepresentation, untruthfulness, falsification.

Federal Insurance Office (FIO)

was established by the Dodd-Frank Wall Street Reform and Consumer Protection Act. This office monitors the insurance industry and identifies issues and gaps in the state regulation of insurers. It also monitors access to affordable insurance by traditionally underserved communities and consumers, minorities, and low- and moderate-income persons. The FIO is not a regulator or supervisor. Insurance is primarily regulated by the individual states. Insurance producer and company trade associations also exist to provide education, support, networking and lobbying for insurance companies and producers.