Chapter 1 Life and Health Insurance

In 1958 the Supreme Court held that the McCarran-Ferguson Act disallowed such supervision by the FTC, a federal agency. Additional attempts have been made by the FTC to force further federal control, but none have been successful.

1958-intervention by the FTC

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

1959-intervention by the SEC

Requires fair and accurate reporting of information about consumers, including applications for insurance. Insurers must inform applicants about any investigations that are being made upon completion of the application.

1970-Fair Credit Reporting Act

1. The producer is the conduit between the company and the insurance-buying public, and must make sure that at all times, their actions are compliant will all current insurance regulations. 2. To help all insurance commonly customers with the best service possible. 3. Solicit new business for the company by assisting clients in the process of acquiring products from application to policy delivery. 4. Knowledgeable about all company products and services. 5. Guide customers to the right products to meet their actual needs and maintain such a relationship regularly. 6. Build a more substantial business for the company by keeping current customers satisfied and actively seeking referrals for new business. 7. Diligently assist in the claims process, keep customers apprised of continuing developments with any claims, and help assure a prompted equitable claims experience. 8. The producer must be acutely aware of company underwriting guidelines to minimize wasting the underwriter's valuable time and skills on poorly matched products and customers and to assist the underwriter in any way to facilitate the application process. 9. Buyer's guide: Each state requires agents to deliver a buyer's guide to consumers that explain various types of life insurance products and other information on the recommended policy, such as premium, dividends, and benefit amounts. 10. Policy summary: help consumers evaluate the suitability of the recommended product. 11. Guaranty Associations: are established by all states to support insurers and protect consumers in the event an insurer becomes insolvent. State life and health guaranty associations provide a safety net for all member life, health, and annuities insurers in a particular state. Guaranty associations protect insureds in the event of insurer insolvency or inability to pay claims up to a specific limit.

Producer Responsibilities

1. The Primary purpose if a rating service company, such as A.M., Best, Fitch Ratings, Standard & Poor's, and Moody's, is to determine a company's financial strength and publish the rating. 2. An insurer's financial strength can usually be evaluated by looking at the companies reserves and liquidity. 3. Reserves: — They are the accounting measurements of an insurer's future obligations to its policyholders. — they are classified as liabilities on the insurance company's accounting statements. 4. Liquidity: — Indicates a company's ability to make unpredictable payouts to policy owners.

Rating Services

Company assuming the risk is the

Reinsurer

The most common reinsurance contract between two insurance companies is called ____________ _____________, which involves an automatic sharing of the risks assumed.

Treaty Reinsurance

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

Actuarial Department

_____________ or _____________ insurer is an insurer who has received a certificate of authority from a states department of insurance authorizing them to conduct insurance business in that state.

Admitted Insurer

1. Specifies certain words and phrases that are considered misleading and cannot be used in advertising of any kind. 2. Requires full disclosure of olive renewal, cancellation, and termination provisions.

Advertising Code

Is a person who acts for another person or entity known as the principal with regard to contractual arrangements with third parties.

Agent

In the United States is an insurer whose principal office and domiciled location is outside the country.

Alien Insurer

Is an insurer with it's principal or home office instate where it is authorized.

Domestic Insurer

1. All state insurance commissioners, directors, or superintendents are members of the National Association of Insurance Commissioners (NAIC). 2. Establishes committees that regularly examine various aspects of the insurance industry and recommend applicable insurance laws and regulations. 3. The NAIC has four boarded objectives: - The encourage uniformity amount state insurance laws and regulations. - To assist in the administration of those laws and regulations by promoting efficiency. - To protect the interests of policy owners and consumers. - To preserve state regulation of the insurance business. 4. NAIFA (National Associations of Insurance and Financial Advisors) and NAHU National Associations of Heath Underwriters): Members of these organizations are life and health agents dedicated to supporting the industry and advancing the quality of service provided by insurance professionals. These companies created a Code of Ethics detailing the expectations of agents in their duties toward clients.

National Association of Insurance Companies

In the SEUA case, the Supreme Court ruled that the insurance industry is subject to a series of federal laws, many of which conflicted with existing state laws. As such, insurance is a form of interstate commerce to be regulated by the federal government.

1944-U.S. v Southeastern Underwriters Assoc.

The Do Not Call Registry allows consumers to include their phone numbers on the list to which telemarketers cannot make solicitation calls.

2003-Do Not Call Implementation Act

Often shortened to the Affordable Care Act (ACA), it represents one of the most significant regulatory overhauls and expansions of health insurance coverage in U.S. history.

2010-Patient Protection and Affordable Care Act (PPACA)

Is the customer receiving insurance protection under an insurance policy,

Insured

Insurance policy typically issued by stock companies, do not allow policy owners to participate in dividends of electing the board of directors.

Nonparticipating Policy

Policies allow policyholders to participate in the company by electing the board of directors and receiving dividends from the divisible surplus.

Participating

Is a group owned liability insurer which assumes and spread product liability and other forms of commercial liability risks amount it's members.

Risk Retention Group

Is typically the department completing the application

Sales Department

1. Stock insurance company is a private organization, organized and incorporated under state laws for the purpose of making a profit for its stockholders (shareholders). 2. It is structured the same as any corporation. 3. Stock dividends are paid to stockholders. 4. Directors and officers are responsible to the stockholders. 5. A stock company is referred to as a nonparticipating company because policyholders do not participate in dividends. 6. Stock companies look to grow their earned surplus or post-tax earnings not paid in dividends. 7. Earnings retained by a company are considered equity and, as such, are owned by the shareholders.

Stock Companies- Nonparticipating

Must be formed for reasons other than obtaining insurance.

Fraternal

Not an insurer but rather an syndicate of individuals and companies that individually underwrite insurance. Can be compared to the New York stock exchange which provides the arena and facilities for buying and selling public stock function is to gather and disseminate under writing into, help it's associates settle claims and dispute, and through it's member underwriters, provide coverages that might otherwise be unavailable in certain areas.

Lloyd's of London

Is an insurance company or independent agent that provides a one stop shop for business or Individuals seeking coverage for all their insurance needs. For example, many large insurers offer individual policies for automobile, homeowner, long term care, life, and health insurance needs.

Multi-line Insurer

_______________________ are referred to as __________________ companies because the policy owners participate in dividends.

Mutual Companies Participating

1. Rather than transfer risk to an insurance company, a self-insurer establishes a self-funded plan to cover potential losses. 2. Large companies often use self funded pension plans and some health insurance plans. 3. 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.

Self-Insurers

Is the unwritten authority that is not expressly granted, but which the agent is assumed to have in order to transact the business of he principal.

Implied Authority

1. Anything not owned by the federal or state government is typically considered a commercial or private insurance company. 2. A company that only sells one line of insurance (for example, only heath insurance) is known as a mono line insurer. 3. Companies that sell more than one line of insurance are known as multi-line insurers.

Private (Commerical) Insurance Companies

Is a company that provides financial protection to insurance companies. ______________ handle risk that are too larger for insurance companies to handle on their own and make it possible for insurers to obtain more business than they would otherwise be able to.

Reinsurer

1. Insurance spreads the risk of loss from one person to a large number of persons through the pooling of premiums. 2. Insurance is the transfer of risk from one party to another through a legal contract, or the transfer of risk through pooling funds. (The policy owner is transferring the chance of a possible financial loss to another party (the insurer), The insurer assumes the risk since it receives a premium.) 3. When the transfer of risk is accomplished by purchasing an insurance policy, the policy owner obtains a large quantity of coverage in return for a small fee (premium)

The Role Of Insurance

The transfer of risk through the pooling or accumulation of funds.

Insurance

Is the insurance company

Insurer

creates an instant estate, regardless of when death occurs.

Life Insurance

Divisions are responsible for increasing the number of prospective applicants.

Marketing or Sales

Companies that sell more than one line of insurance are known as ?

Multi-Line Insurers

Insurance evolved to produces a _____________ __________ to economic uncertainties and losses.

Practical Solutions

May or may not be policy holders.

Stockholders

Is responsible for reviewing applications, conducting investigations to gain additional information about applicants, assigning risk classifications, and approving or declining an application.

Underwriting Department

Also do not allow policyholders to participate in electing the company's board of directors.

Non-participating Insurance Policies

In 1999 Congress passed the Financial Services Modernization Act, which repealed the Glass Steagall Act. Under this new legislation, commercial banks, investment banks, retail brokerages, and insurance companies can now enter each other's lines of business.

1999- Financial Services Modernization Act

1. American Agency System represents any number of insurance companies through contractual agreements. 2. They are compensated on a commission or fee basis for the business they produce.

Independent Agency System

Is characterized by relatively small face amounts (usually $1,000 to $2,000) with premiums paid weekly.

Industrial Insurance

Is characterized by relatively small face amounts with premiums paid weekly.

Industrial Insurance

1. Assessment mutual companies are classified by the way in which they charge premiums. 2. A pure assessment mutual company operates on the basis of loss-sharing by group members.

Strong Assessment Mutual Insurers

The organization must be nonprofit, have a lodge system that includes ritualistic work, and maintain a representative form of government with elected officers.

Fraternal Benefit Society

_______________ _______________ are insurance companies characterized by having no capital stock, being owned by it's policy owners and usually issue participating insurance.

Mutual Insurance Company

_______________ or ______________ is an insurer who has not received a certificate of authority from a states department of insurance authorized them to conduct insurance business in that state.

Non-admitted Insurer

Or risk purchasing group only has to be licensed in one state but may insure members in any State.

Risk Retention Group

Establishes a self-funded plan to cover potential losses.

Self-Insurer

1. An insurer that is allowed or authorized to conduct insurance business in a particular state is referred to as an authorized or admitted insurer. - Authorized (admitted) insurers are issued as a certificate of authority. 2. An unauthorized insurer (non-admitted company) is not permitted nor allowed to conduct insurance operations in a particular state. - Unauthorized (non-admitted) insurers do not have a certificate of authority. - In some states, non-admitted insurers 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.

Insurer Classification According to Authorization

In a reinsurance agreement, the insurance company that transfers its loss exposure to another insurer is called the

Primary Insurer

Companies issue the non participating insurance policies.

Stock Insurance

_____________ or _____________ insurance companies are companies owned by private citizens or groups that offer one or more insurance lines. Commercial insurers are not government - owned.

Private (Commercial) Insurer

Is the appearance of assumption of authority based on the principal's actions, words, or deeds.

Apparent Authority

Is an insurer with it's principal office or domicile location in a state different from the state it is transacting insurance business.

Foreign Insurer

Establishes a self funded plan to cover potential losses instead of transferring to risk to an insurance company.

Self-Insurers

According to 18 U.S.C. 1033 and 1034, it is a criminal offense for an individual who has been convicted of a felony involving dishonesty or breach of trust to willfully engage or participate (in any capacity) in the business of insurance without first obtaining a "Letter of Written Consent to Engage in the Business of Insurance" from the regulating insurance department of the individual's state of residence.

1994-U.S. Code (USC) Sections 1033 and 1034.

1. Every state requires its licensed producers to adhere to specific standards designed to protect consumers and promote suitable sales and application of insurance products. 2. Selling needs : - The ethical agent determines the client's needs and then determines which is best suited to address those needs. - Two principle of needs-based selling include finding the facts and educate the client. 3. Suitability of recommended products. - The ethical agent assesses the correlation between a recommended product and the client's needs and capabilities by asking and answering the following questions. - What are the client's needs? - What products can help meet those needs? - Does the client have the capability, financially, and otherwise, to manage the product? - Is this product in the client's best interest? 4. Full and accurate disclosure. - The ethical agent makes it a practice to inform clients about all aspect of the products recommended, including benefits and limitations. - There should never be an attempt to hide or disguise the product's nature Or purpose or the company being represented. Insurance products should be presented clearly, completely, and accurately. 5. Documentation. - The ethical agent will document each client's meeting and transaction. - The agent uses fact-finding forms and obtains the client's written agreement for the needs determined, the products recommended, and the decisions made. - Ethical agents now the state laws regarding documentation and follow them precisely. 6. Client service. - The ethical agent knows that a sale marks the beginning of a client relationship. - Routine follow-up calls are recommended to ensure that the client's needs always are covered, and the products in place still are suitable. - When clients contact their agents for service or information, these requests are given top priority. - Complaints are handled promptly and thoroughly.

Client Service

1. 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. 2. 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. 3. 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.

Insurer Classification According To Domicile

Is an insurance policy under which the policy-owners share in the company's earnings through receipt of dividends and also elect the company's board of directors.

Participating Plan

Is an insurance company waned and controlled by a group of stockholders (or share holders) whose investment in the company provides the safety Martian necessary in the issuance of guaranteed, fixed premium, nonparticipating policies.

Stock Insurance Company

1. Most jurisdictions have adopted the NAIC's Unfair Trade Practices Act. 2. Gives the head of each state insurance department power to issue a cease and desist order, investigate insurance companies and producers, and impose penalties for violations. 3. Gives officers the authority to seek a court injunction to restrain insurers from using any methods believed to be unfair. 4. Included in the context of unfair trade practices; - Misrepresentation - False advertising - Coercion - Intimidation - Unfair discrimination - Inequitable administration of claims settlements

Unfair Trade Practices Act

1. Is not an insurer but rather a syndicate of individuals and companies that individually underwrite insurance. 2. Can be compared to the New York Stock Exchange, which provides the arena and facilities fo buying and selling public stock. 3. Function is to gather and disseminate underwriting information, help its associates settle claims and disputes, and , through its member underwriters, provide coverages that might otherwise be unavailable in certain areas.

Lloyd's of London

1. An insurer using direct selling and mass marketing methods deals directly with consumers by selling its policies through vending machines, advertisements, or salaried sales representatives. 2. No agent or broker is involved. 3. Also includes internet, newspaper, magazine, radio and television ads. 4. Provide exposure to large groups of consumers, often using direct selling methods with occasional follow up by agent.

Other Methods of Selling Insurance

Agents are also classified as

Captive, Career Agents or Independent Agents

Are branches of major stock and mutual insurance companies that are contracted to represent an insurer in a specific area.

Career Agencies

1. Are branches of major stock and mutual insurance companies that are contracted to represent an insurer in a specific area. 2. Recruit,train, and supervise agents through managers or general agents. They primarily build staff. 3. An insurer uses the managerial system when they hire a salaried branch manager to run the agency instead of a general agent. the branch manager supervises agents working out of that branch office. The insurer pays the branch manager's salary and pays him bonus based on the amount and type of insurance sold and the number of new agents hired.

Career Agency System

Company transferring the risk is called the

Ceding Company

Is a license issued to uninsured by a dept of insurance (or equivalent state agency) which authorizes that company to conduct insurance business in that particular state.

Certificate of Authority

Is responsible for processing, investigating, and paying claims for losses incurred by insureds.

Claims Department

Is the department within an insurance company responsible for reviewing applications, and or declining applications, and assigning risk classifications.

Underwriting Department

This case, which the U.S. Supreme Court decided, involved one state's attempt to regulate an insurance company domiciled in another state.

1868- Paul v. Virginia

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.

1945-The McCarran Ferguson Act

The Patriot Act, which amends the Bank Secrecy Act (BSA), was adopted in response to the September 11,2001, terrorist attacks. The Patriot Act is intended to strengthen U.S. measures to prevent, detect, and deter terrorists and their funding. The act also aims to prosecute international money laundering and the financing of terrorism. These efforts include anti-money laundering (AML) tools that impact the baking, financial, and investment communities.

2001-Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act

Insurer established and owned by a parent firm of the purpose of insuring the parent firm's loss exposure is known as a

Captive Insurer

Most contracts offered to individuals and organizations in society, including health, property, and casualty policies, are contracts of indemnity whose primary purpose is to pay off financial losses and reimburse the insured.

Benefit of Insurance

1. Most contracts of insurance are contracts of indemnity designed to pay off financial losses and reimburse the insured. 2. 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. 3. Insurers take some of their revenue and invest it back into local and national economies to benefit all society.

Benefits and Costs of Insurance to Society

Represents themselves and the insured (the client or customer )

Broker

An insurer established and owned by a parent firm for the purpose of insuring the parent firm's loss exposure is known as a

Captive Insurer

An insurer that is established and owned by a parent firm for the purpose of insuring the parent firm's loss.

Captive Insurer

1. Marketing or sales divisions are responsible for increasing the number of prospective applicants, thereby increasing the number of insureds, through various advertising mediums and 1-1 appointments with prospective buyers. 2. Sales department is typically the department completing the application. They may also be known as field underwriters. 3. Underwriting department is responsible for reviewing applications, conducting investigations to gain additional information about applicants, assigning risk classifications, and approving or declining an application. 4. Claims department is responsible for processing, investigating, and paying claims for losses insurers by insureds. 5. Actuarial department calculates policy rates, reserves, and dividends and makes other applicable statistical studies and reports focusing on morbidity and mortality tables.

Departments within an Insurance Company

In any ___________ between the insured or beneficiary and the insurer, the agent who solicits an insurance application represents the insurer and not the insured or beneficiary.

Dispute

Is the amount of earnings paid to policy owners as dividends after the insurance company sets aside funds required to cover reserves, operating expenses, and general business purposes.

Divisible Surplus

Is the authority a principal deliberately gives to its agent.

Express Authority

1. Fraternal societies have memberships based on religious, national, or ethnic lines. 2. To be characterized as a fraternal benefit society, the organization must be nonprofit, have a lodge system that includes ritualistic work, and maintain a representative form of government with elected officers. 3. Fraternal must be formed for reasons other than obtaining insurance. 4. Today, fraternal benefit societies issue insurance with similar provisions found in insurance policies issued by commercial insurers. 5. Fraternal benefit societies are more concerned about maintaining minimum reserves and surpluses for coverage than providing dividends or profits.

Fraternal Benefit Societies

1. Most consumers purchase insurance through licensed producers who present insurers' products and services to the public via active sales and marketing methods. - Producer agents represent a particular company. - a captive or career agent works for one insurance company and sells only that company's' insurance policies. 2. Producer brokers are not tied to any particular company and can represent many insurers' a products. - An independent agent works for himself and sells the insurance products of many companies. - May represent as many insurers as will appoint him. 3. In a sales transaction, agents represent the insurer, and the brokers represent the buyer.

How Insurance is Sold

Make up a specialized branch of the industry, primarily providing policies with small face amounts with weekly premiums. Other names for industrial insurers include home service or debit insurers.

Industrial Insurer

Indicates a company's ability to make unpredictable payouts to policy owners.

Liquidity

1. Mutual insurance companies are also organized and incorporated under state laws, but they have no stockholders. 2. The owners are the policyholders. 3. Anyone purchasing insurance from a mutual insurer is both a customer and an owner. 4. Policy owners have the right to vote for members of the board of directors. 5. Mutual companies are referred to as participating companies because the policy owners participate in dividends. 6. By issuing participating policies that pay policy dividends, mutual insurers allow their policy owners to share in any company earnings (divisible surplus). Divisible surplus - is the amount of earnings paid to policy owners as dividends after the insurance company sets aside funds required to cover reserves, operating expenses, and general business purposes. 7. Policy dividends represent a refund of the portion of premium remaining after the company has set aside the necessary reserves and has made deductions for claims and expenses. 8. Surpluses are typically distributed to policy owners on an annual basis. 9. Mutual companies can convert to stock companies through a process called demutualization. 10. A stock insurance company issuing both participating and nonparticipating is referred to as using a mixed plan. Participating policies allow policyholders to participate in the company by electing the board of directors and receiving dividends from the divisible surplus. Nonparticipating policies do not allow policyholders to participate in elections or dividends and instead aim to increase profit for the shareholders.

Mutual Companies- Participating

1. Do not recruit, train, or supervise agents. They primarily sell insurance. 2. Agents hired by PPGA are considered employees of the PPGA, not the insurance company, and are supervised by regional directors.

Personal Producing General Agency System

In order to qualify for ________ coverage, an effort has to be made to secure coverage in the authorized market. Individual may not attempt to secure coverage, just because it may be less expensive.

Surplus Lines Insurance

1. Private citizens or groups own private (commercial) insurance companies. Offer individual, group, industrial, or blanket insurance policies. 2. Government insurers are owned and operated by a Federal or State entity. May Either: write insurance to cover perils that are not insurable by commercial insurers (war, flood, a nuclear reaction) or write insurance on insurable risks and thus compete with the commercial marketplace (social insurance such as Workers' Compensation). 3. Government insurers generally write insurance to cover catastrophic perils (flood) or to protect a segment of society (the elderly) against catastrophic medical costs (Medicare). 4. Examples of government insurance programs include: - National Flood Insurance Program, and Federal Crop Insurance Corporation - Social Security,Medicare, and Medicaid - Serviceman's Group Life Insurance (SGLI) and Veteran's Group Life Insurance (VGLI)

Private Versus Government Insurance

Two types of insurance companies

Private vs Government Insurance

Operates on the basis of loss-sharing by group members.

Pure Assessment Mutual Company

In the insurance industry, a rating service company's primary purpose is to determine the financial strength of the industry's insurers.

Rating Service

1. Similar to mutual, reciprocal insurers are organized on the basis of ownership by their policyholders. 2. The policyholders themselves insure the risks of the other policyholder. 3. Each policyholder assumes a share of the risk brought to the company by others. 4. An attorney-in-fact manages reciprocals.

Reciprocal Insurers

Are organized on the basis of ownership by their policyholders

Reciprocal Insurers

Is the acceptance by one or more insurers, called reinsurers, of a portion of the risk underwritten by another insurer who has contracted for the entire coverage.

Reinsurance

1. Is an arrangement by which an insurance company transfers a portion of an assumed risk to another insurer. 2. Takes place to limit the loss of any one insurer would face should a very large claim become payable. It also enables a company to meet particular objectives, such as favorable underwriting or mortality results. 3. The company transferring the risk is called the ceding company. 4. The company assuming the risk is the reinsurer. 5. The portion of the risk that the ceding insurer retains is called the net retention (or net line). 6. Treaty reinsurance involves an automatic sharing of the risks assumed. In a reinsurance agreement, the insurance company that transfers its loss exposure to another insurer is called the primary insurer.

Reinsurers and Retention Limits

Are the accounting measurement of an insurer's future obligations to its policy holder.

Reserves

1. RRGs and RPGs are group-owned liability insurers that assume and spread product liability and other forms of insurance risks among its members. 2. This type of group is formed for the primary purpose of retaining or pooling risk. 3. Risk retention groups are licensed in their state for domicile and are owned by their policyholders, who are business owners (who are also the shareholders). 4. A risk retention group or risk purchasing group only has to be licensed in one state but may insure members in any State.

Risk Retention and Risk Purchasing Groups

1. Service providers offer benefits to subscribers in return for the payment of a premium. These services are packaged into various plans, and those who purchase the plans are known as subscribers. Examples, of service providers are Health Maintenance Organizations (HMO) and Preferred Provider Organizations (PPO).

Service Providers

Refer to the non traditional insurance market.

Surplus Lines

1. Refers to the nontraditional insurance market. 2. A person will seek coverage through a surplus lines broker in order to secure coverage for high or unusual risks (hole-in-one insurance or non-appearance coverage). 3. In order to qualify for surplus lines coverage, an effort has to be made to secure coverage in the authorized market. (An individual may not attempt to secure coverage just because it may be less expensive.)

Surplus Lines Insurance