Basic Principles of Insurance

Private (Commercial) Insurance Companies

* Anything not owned by the federal or state government is typically considered a commercial or private insurance company. * A company that only sells one line of insurance (for example, only health insurance) is known as a monoline insurer. *Companies that sell more than one line of insurance are known as multi-line insurers.

1933 Glass-Steagall Act

Separated commercial and investment banking by barring common ownership of banks, insurance companies and securities firms, erected regulatory wall btw. banks and non-financial companies.

1958-Intervention by the FTC

Supreme Court held that the McCarran-Ferguson Act disallowed such supervision by the FTC, a federal agency.

1959 Intervention by the SEC

The Supreme Court ruled that federal securities laws applied to insurers that issued variable annuities and, thus, required these insurers to conform to both SEC and state regulation. The SEC regulates variable life insurance.

Demutualization

a mutual company is converted into a stock insurer

Personal Producing General Agent System

Don't recruit, train, or supervise agents; they primarily sell insurance and are considered employees of the PPGA not insurance company.

Benefits and Costs of Insurance to Society

- Most contracts of insurance are contracts of indemnity designed to pay off financial losses and reimburse the insured. - The premium cost can be reduced when the insured implements loss control measures (for example, smoke alarms or a sprinkler system) to lower the chance of a loss occurring in the first place. - Insurers take some of their revenue and invest it back into local and national economies to benefit all society.

Insurer Classification According To Domicile

-A domestic insurer has its principal or home office in a state where it is authorized. ~Is chartered in or formed under the laws of the state where it is authorized. ~Nationwide Insurance Company of Columbus, Ohio, operates as a domestic insurer in the State of Ohio. -A foreign insurer is authorized in one state, but its charter or principal office is in another State. ~Nationwide Insurance Company is also licensed or authorized in the State of Illinois as a foreign insurer. -Alien insurers are insurers authorized in any state within the U.S., whose principal office is located outside this country. ~Nippon Life of Tokyo, Japan, or Sun Financial Services of Toronto, Canada, are examples of alien insurers.

Stock Companies - Nonparticipating

-A private organization, organized and incorporated under state laws for the purpose of making a profit for its stockholders -Structured the same as any corporation -Stockholders may or may not be policyholders -is non-participating because because policyholders do not get dividends -the directors and officers are responsible to the stockholders -A stock company is referred to as a nonparticipating company because policyholders do not participate in dividends -look to grow earned surplus

Strong Assessment Mutual Insurers

-Assessment Mutual Companies are classified by the way they they charge premiums -A pure assessment mutual company operates on the basis of loss-sharing by members -No premium is payable in advance; each member is assessed a portion of losses that occur -An advance premium assessment mutual charges a premium at the beginning of of the policy period -If original premium exceeds the operating expenses and losses, surplus is returned to policyholders as dividends -If total premiums aren't enough to meet losses, additional assessments are levied against members

Fraternal Benefit Societies

-Have memberships based on religious, national, or ethnic affiliations. -Must be non-profit and have a lodge system -Must be formed for reasons other than obtaining insurance -they issue insurance with similar provisions found in policies issued by commercial companies -concerned more about maintaining minimum reserves and surpluses for coverage than providing dividends for profits

Producer broker

-Independent agent works for themselves and sells insurance products of many companies -May represent as many insurers as will appoint them

How Insurance Is Sold

-Most consumers purchase insurance from licensed insurance producers. -Insurance producers may be agents who represent a specific company or broker's who represent several companies.

Surplus Lines Insurance

-Nontraditional insurance only available from a surplus lines insurer. -They offer coverage for substandard or unusual risks not available through private or commercial carriers. -In order to qualify, an effort has to be made to secure insurance in the authorized market

Risk Retention and Risk Purchasing Groups

-RRGs and RPGs are group-owned insurers that assume and spread product liability and other forms of insurance risks among its members -this type of group is formed for the primary reason of retaining or pooling risks (i.e. they take responsibility for risk instead of transferring it) -RRGs are licensed in their state of domicile and are owned by policyholders, who are business owners/shareholders -RRG or RPG only has to be licensed only one state but may insure members in any state

Self-Insurers

-Rather than transfer risk to an insurance company, a self-insurer establishes a self-funded plan to cover potential losses. -Large companies often use self-funded plans for funding pension plans and some health insurance plans. -A self-insurer may look to an insurance company to provide insurance above a specified maximum level of loss. The self-insurer will bear the amount of loss below that maximum amount.

Reciprocal Insurers

-Similar to mutual insurer, reciprocal insurers are organized on the basis of ownership by their policyholders. -The policyholders themselves insure the risks of the other policyholders. -Each policyholder assumes a share of the risk brought to the company by others. -An attorney-in-fact manages reciprocals.

Role of insurance

-To transfer the risk of financial loss from an individual or business to an insurance company -Insurance spreads the risk of loss from one person to a large number of persons through pooling premiums When the transfer of risk is accomplished by purchasing an insurance policy, policyowner obtains a large quantity of of coverage in return for a small fee

Reinsurers and Retention Limits

-an arrangement by which an insurance company transfers a portion of assumed risk to another insurer -takes place to limit the loss one insurer would face should a very large claim become payable; also enables company to meet particular objectives, i.e. underwriting or mortality results -the company transferring risk is called the ceding company -company assuming risk is the reinsurer -the portion of the risk the ceding insurer retains is called net retention Treaty reinsurance involves an automatic sharing of risk assumed -in a reinsurance agreement, the insurance company that transfers its loss exposure to another insurer is s the primary insurer

Lloyd's of London

-not an insurer, but a society of members who underwrite insurance in syndicates -can be compared to the NYSE which provides arena and facilities for buying/selling stocks -gathers and disseminates underwriting info, help associates settle claims and disputes, provides coverage that might otherwise be unavailable in certain areas

Agent Marketing and Sales Practices

1 )Selling to needs - Fact find & educate 2) Suitability of products - can't sell an old man green bananas (he might not live to see them ripen) 3) Full & accurate disclosure - tell all 4) Documentation - write it all down 5) Client services - follow-up

1999 Financial Services Modernization Act

Enacted by Congress, allowed banks, insurance companies, and securities firms to enter each others' business areas; allowed creation of financial services holding company.

1945 McCarran and Ferguson Act

Enacted by Congress, this law made it clear that the states' continued regulation of insurance was in the public's best interest. However, it also made possible the application of federal antitrust laws to the extent that [the insurance business] is not regulated by state law.

In a sales transaction...

Agents represent the insurer; brokers represent the buyer.

National Association of Insurance Commissioners

All state insurance commissioners, directors, or superintendents, are members, establishes committee that meets regularly to examine various aspects of insurance industry, has 4 objectives: encourage state uniformity, assist in administration of laws and regulations, protect policyholders' and consumers' interests, and preserve state regulations.

Captive Agent

An insurance agent who represents only one insurance company and who is, in effect, an employee of that company

1940-Fair Credit Reporting Act

Enacted by federal government to, protects individual rights to privacy, requires fair and accurate reporting of info about consumers, insurers must inform applicants about investigations when completing application, insurer must furnish name of reporting agency.

Insurer Classification According To Authorization

An insurer that is admitted or authorized to transact insurance business in a particular state is referred to as an authorized insurer in that state. -Also known as admitted insurers, an authorized company is issued a certificate of authority. -Generally, an unauthorized (non-admitted) insurance company is not permitted nor allowed to conduct insurance operations in a particular State. -In some cases, a non-admitted insurer may still offer surplus lines insurance without a certificate of authority if no authorized insurer in the market is available or willing to take the risk. -The surplus insurance market is heavily regulated, requires additional licensing, and typically does not offer the consumer the same protections as the primary insurance market.

Career Agent System

Branches of major and major stock insurance companies contracted to represent an insurer, recruit, train and supervise agents, they build staff, insurer uses managerial system when they hire branch manager.

Sales department

Completes insurance application, also known as field underwriters

1944 US v. South-Eastern Underwriters Association

Decided by Supreme Court, ruled that insurance industry is a form of interstate commerce, did not interfere with states' power but nullified state laws conflicting w/federal laws

1868-Paul v. Virginia

Decided by U.S. Supreme Court, involved one state's attempt to regulate an insurance company domiciled in another state, ruled that states have right to regulate insurance

2001 USA Patriot Act

Designed to detect and deter terrorists and their funding by imposing anti-money laundering requirements on brokerage firms and financial institutions.

Rating Services

Determines insurance company strength and make it public. This is done by looking at company's reserves (accounting of an insurer's future obligations to policyholders) and liquidity (classified as liabilities on a insurance company's accounting statements). Example is companies like: A.M. Best, Fitch Ratings, Standard and Poor's and Moody's.

Producer Responsibilities

Help customers, solicits new business by assisting clients, knowledgeable about company products, guides customers, assists in claims, aware of underwriting guidelines, gives buyer's guides, policy summary and advised on guaranty associations.

Independent Agency System

Independent agents representing a number of insurance companies through contractual agreements, work on commission or fee basis.

Unfair Trade Practices Act

Issues cease and desist orders, investigate insurance companies and producers and impose penalties for violations, gives officers authority to seek court injunction and reduces unfair practices of: misrepresentation, fakes advertising, coercion, intimidation, unfair discrimination, inequitable administration of claims settlements.

Private versus government insurers

Most insurance is written through private insurers. However, there are instances where governmental-based insurers step in to offer an insurance alternative when private insurers are unable to provide protection. This usually relates to the catastrophic nature of the risk (i.e. National Flood Insurance, , Medicare to cover elderly), 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.

Marketing and sales department

Responsible for increasing number of prospective applicants and insureds; uses various advertising methods and one-on-one appointments

Mutual Companies - Participating

Mutual insurance companies are also organized and incorporated under state laws, but they have no stockholders. -Owners are the policyholders -Anyone purchasing insurance from a mutual insurer is both a customer and an owner. -Has the right to vote for members of the board of directors. ---By issuing participating policies that pay policy dividends, mutual insurers allow their policyowners to share in any company earnings. -Referred to as participating companies because policyowners participate in dividends. -Surpluses usually distributed to policyowners on annual basis -Stock insurance company issuing both participating and nonparticipating is referred to as using a mixed plan

1969 The National Conference of Insurance Legislators (NCOIL)

Organization formed to help legislators make informed decisions on insurance issues affecting constituents and declare opposition to federal encroachment of state authority to oversee the business of insurance.

Claims department

Processes, investigates, and pays claims for losses

Evolution of Oversight

Promotes public welfare by maintaining company solvency, provides consumer protection, ensures fair trade practices and fair contracts at fair prices.

Advertising code

the code specifies certain words and phrases that are considered misleading and are not to be used in advertising of any kind, requires full disclosure of policy renewal, cancelation and termination.

Mutualization

a stock company converting to a mutual company

captive insurer

an issuer established and owned by a parent firm for the purpose of insuring the parent firm's loss exposure

Actuarial Department

calculates policy rates, reserves, and dividends and makes other applicable statistical studies and reports focusing on morbidity and mortality tables.

Service Providers

offer benefits to subscribers in return for the payment of a premium that can be packaged into various plans; those who purchase a plan are "subscribers" -an example is a HMO and PPO

earned surplus

post-tax earnings not paid in dividends