Fundamentals of Insurance Chapter 3

W/regards to Lloyds of London, who provides the insurance (that is who is the insurer)?

Lloyd's itself does not directly issue insurance policies; insurance is written by underwriting members who "sign each for himself and no for another." Insurance is the underwriters at Lloyd's. Policyowner insures at Lloyd's but not with Lloyd's.

Bill Jones asks advice. Better to purchase homeowners insurance from independent insurance agency, which represents several inusurers, or an exclusive agent, represents only one insurance company? As a FP how do you respond?

Neither type is inherently better. Independent agency can shop among the coverages available from more than one insurance company, exclusive agency might provide sound, competitive coverage from single company. More important for client to consider the coverage, price, character, and marketing system behind the scenes.

How do reciprocal exchanges differ from mutual insurance?

Reciprocal exchanges are not mutual insurers in legal sense b/c individual subscribers assume liability as individuals, not group as whole. Reciprocal exchanges not incorporated but formed under spearate laws as associations under attorney-in-fact.

independent agency system

agency is independent business organization, represents several insurance companies or groups of companies, head of agency pays all operating expenses, compensated through commissions, may be paid fees by insurer for settling small claims, some authority to bind insurer for client's coverage, collect premium, submit application to insurer, deliver policy to policyowner. Independent agent owns business and can sell upon leaving industry field.

exclusive agency system

agent represents only one company or group of affiliated companies, compensation comes from commissions on the sale of new business, lower commission rates on renewals. Insurer may cover some of agent's operating expenses, agent given limited or no ownership, use, or control of policy and expiration data, no control over business if she leaves insurance field

branch office system

aka managerial system, headed by salaried branch manager who is responsible for hiring, training, motivating and supervising agents, insurer bears costs of operating the branch, branch manager may receive a bonus based on production of business

agent

aka producer, represents a principal (insurer) compensated by commission that is a percentage of the premium, powers defined by contract with insurer or agency, express authority, implied authority, apparent authority; owes principal- reasonable care, obey instructions, maintain records, keep P informed, comply with contract. P owes agent pay for services, maintain records, reimburse for expenses incurred, reimburse for liability incurred through no fault of agent, comply with contract.

surplus lines broker

places coverage with non admitted insurers, provide insurance when no other market is available, liability insurance for amusement parks, ski resorts, products, deals with the policyowner's broker rather than directly with policyowner. May need a special license in many states

brokers

represent policy owner, can offer significant advice or counsel to clients, independent contractor, paid by client, insurer, both, no authority to bind coverage, policyowner bound to brokers acts; fraud committed by broker is responsibility of policyowner

assessment mutuals

small mutual companies, policyowners may or may not pay advance premiums, but can be assessed for a portion of the company's losses and expenses at the end of the policy period. Policyowner's liability for the assessment may be limited or unlimited

blue cross/blue shield

subscriber medical expense protection, blue cross covers hospital expense on a service bases rather than reimbursement, blue shield provides physician services coverage. traditionally operated in separate geographic areas, but now offered together,

binder

temporary evidence of insurance; identifies insurer, coverage, limits that apply and duration

reciprocal exchange

unicorporated pool of funds owned by policyholders and managed by an attorney in fact, each policyholder insured by the others,

fraternal insurer

usually life insurance, operations controlled by bylaws of nonprofit social organization

What are three powers held by an agent and the legal duties an agent and principal owe each other?

Agent's powers are defined by contract with the insurer. Agency contract spells out the agent's express authority. Agent has implied or incidental authority to carry out acts needed to exercise express authority. Agent's acts may bind the principal even if those acts are outside the scope fo the agent's express or implied authority, or if within the agent's apparent authority. Type of authority arises when agent, without contrary action by principal, performs an act appearing to a reasonable person to be within the agent's express or implied authority. Legal duties an agent owes to principal are duty to be loyal to principal, not to be negligent, obey instructions given by principal. Duties principal owes agent include duty to give agent opportunity to work, compensate the agent, keep accounts of amounts owed agent, reimburse agent for authorized payments and liabilities incurred while working for principal.

What are the features of stock and mutual insurance companies as to form of business ownership, voters for the board of directors, and recipient's of dividends?

Both stock and mutual insurance companies are corporations. Stock company is owned by stockholders who elect board of directors and receive any dividends. Mutual company is owned by policyowners who elect board of directors and receive dividends.

After discussing insurance policy from mutual insurance company with your client, Sara Lott, she asks whether mutual insurance companies always provide lower-priced coverage because they do not need to earn a profit for stockholders. How do you respond?

Both stock and mutual insurance companies attempt to operate in a very competitive marketplace, and profits or contributions to surplus account for only a small component of the insurance premium. Factors other than the insurer's organizational structure have a greater bearing on the ultimate cost of insurance to the consumer.

Why does a financial planner need to understand how the insurance business markets its contracts and services?

Financial planners must understand insurance marketing because they are active participants int he marketing process, derive some of their compensation from being participants, work with consumers to help them understand the choices available, and methods companies use to sell & service insurance contracts are significant in determining costs and usefulness.

What is the difference between insurance agents and brokers in terms of whom they represent? their power to bind the insurance company?

a. An agent is a representative of the insurance company. A broker acts on behalf of the applicant for insurance or the policyowner after the insurance goes into effect. b. An insurance agent is acting under specific and delegated authority from the insurer and is sometimes authorized to bind coverage within specific limits. A broker has no such authority. Because the broker represents the policyowner/applicant, the policyowner/applicant is bound by the broker's acts.

What are the key features of the following agency systems used to market life insurance? general agent branch office or managerial system personal producing general agent?

a. General agent is individual entrepreneur granted a franchise by an insurer to market the insurer's products in a specified geographic area. General agent represents one insurer, responsible for hiring, training, motivating and supervising agents. General agent fully responsible for all expenses of operating agency. Shift in recent times, insurance companies give financial assistance to general agent. b. branch office or managerial system, insurer establishes branch offices in the areas where it writes business, each branch headed y a manager who is a salaried employee of the company. Manager is responsible for hiring, training, motivating and supervising agents. Insurer bears full cost of operating the branch. Branch manager may receive a bonus. c. personal producing general agent- variation for the general agency system. insurer hires experienced agent as it's general agent in a given territory. PPGA main responsibility is to sell insurer's products, rather than to build an agency. PPGA receives higher commissions to help cover expenses. May have quotas, but may be able to represent other companies.

Mark and Liv Olson have individual life insurance policies issued by a mutual insurance company with headquarters in their state, a homeowners policy issued by a stock insurance company based in another state and an auto insurance policy issued by a reciprocal exchange. They also have medical expense protection through a Blue Cross/Blue Shield plan provided by employer. What different types of insurers are the Olson's dealing with? What different types of marketing representatives are the Olsons dealing with?

a. Insurance headquartered in their state is a domestic insurance company; insurance company based in another state is technically known as a foreign insurance company. If both licensed for business in the Olson's state, difference should have no effect on the Olsons. Mutual insurance company providing life insurance is owned by its policyowners. As part-owners, Olsons can vote to elect board of directors, receive dividends. Stock insurance company that provides homeowner's insurance is owned by corporate stockholders who have purchased shares of stock. Stockholders elect board of directors and receive dividends. Reciprocal exchange providing auto insurance is unincorporated association, each policyowner insures the other policyowners, managed by an attorney in fact. Blue Cross/Blue Shield provide medical expense protection, operated by providing hospital and physician services rather than $ amount. Most plans now operate like insurance companies, but benefit from favorable state taxation, underwriting and rating flexibility is limited. Differences have little to no effect on Olsons. B. the insurance salesperson who represented many different insurance companies worked for an independent agency- an independent business that contracts with various insurance companies. Salesperson representing only one insurer was probably an exclusive agent, bound to dell insurance for one insurance company or group of related companies only

In recent years, numerous mutual insurance companies have shifted to a stock form of organization through the process of demutualization. Why do companies demutualize? What are the potential disadvantages associated with demutualizing?

a. Most important reason for demutualization is to enable insurer to raise capital quickly. Second reason is to enable the insurance company to diversify activities by acquiring other insurers or types of financial institutions by issuing or exchanging stock. Third reason is to facilitate payment of noncash compensation to the insurance company's key executives and board members. b.Time, cost, and complexity may be enormously difficult due to regulatory, tax, legal, and accounting problems. Regulatory requirement that policyowners must be compensated adequately for loss of ownership rights. Second disadvantage as a stock company vulnerable to hostile takeover. Third, stock company has to meet SEC and state rules regulating it's equity securities. Fourth, major change in corporate philosophy that may be difficult to accept.

FP advises Tom Johnson to meet with agent at all-lines agency to get coverage for various protection needs. In each instance indicate whether Tom needs immediate coverage and why. Agent gathers information about Tom's new home and its contents and recommends homeowner's policy with XYZ company. Tom agrees to the price and level of service of the company and the agent tells Tom he is covered. Agent gathers information about Tom's family and needs in event of death. Tom has existing group life coverage at work. Agent recommends additional $500k variable universal life policy. Agent cites flexibility, premium payments, investment choices. Tom completes application and gives the agent the min. first premium. Agent tells Tom you'll like your policy.

a. Tom immediately covered by XYZ insurance company under homeowners policy. Property-liability agents have authority to bind companies for most cases. The agent bound the company by telling Tom he was covered. b. Tom not immediately covered by Life Company. Life insurance agent does not have authority to cover applicant immediately.

I binding authority generally given to each of the following by their insurers? Life insurance agents? Property-liability insurance agents?

a. life insurance agents authority is limited in the ability to accept business or bind the coverage. Life insurer issues the contract after receiving written, signed application and medical report. Agent my not cover the policyowner immediately, not may contract modifications be made later without the insurance company's approval. b. property and liability insurance agents are granted authority set forth in agency agreement. Agents may bind their companies for client coverage in certain cases. Done by oral or written binder, which is temporary evidence of coverage until the full policy is issued by the insurance company.

What are the key features of the two main agency systems- the independent agency system and the exclusive agency system- used to market property-liability insurance? How many companies or groups of companies does a producer represent? Who pays operating expenses? What is the relative size of renewal versus initial commissions? Who generally has ownership, use, and control of policy and expiration data? Who generally collects permiums and settles claims?

a. under independent agency system, an agency represents several companies or groups of companies, while under the exclusive agency system, only one company is represented. b. Under the independent system, the agency is an independent business organization, pays its own operating expenses. Under the exclusive system, insurer may cover the agent's operating expenses, particularly for new agents. c. Independent agency system, commission rates are generally the same for new and renewing property and liability policies. Exclusive agency system, lower commission rates are paid for renewals than new policies. d. Independent agent generally has ownership, use and control of policy and expiration data; under the exclusive system, the insurer generally has these rights. e. Independent agent collects premiums and settles small claims (trend toward insurer performing these duties). Exclusive system insurer generally performs these duties, though agent may collect initial premiums and settle some small claims.

stock insurance company

corporation owned by stockholders who vote for board of directors and receive dividends, policyowners first cost is usually final cost

Lloyds Associations

groups of individual insurers; insurance issued by individual underwriters for a specified maximum,

PPGA- personal producing general agent

hired by insurer to cover geographic territory; receives higher commissions, pays own expenses, may have quotas.

general agency system

historically, independent entrepreneur granted a franchise to market to a geographic area, represent single insurer, responsible for hiring, training, motivating, supervising agents, compensated solely by commission. Recently, insurers proving financial assistance to general agency system.

mutual holding company

hybrid organization of mutual insurance company and stock insurance company, designed to overcome disadvantages of mutual insurance company, holding company controls a stock insurer by 51% majority, remaining stock is used to raise additional capital.

foreign insurer

insurer doing business in a state other than the state of its incorporation

domestic insurer

insurer doing business in the state of its domicile

alien insurer

insurer incorporated in another country but doing business in the United States; eg domiciled in Germany but doing business in New York.

nonadmitted insurer

insurer no licensed or authorized in policyowner's home state, may be licensed in other states or foreign countries

direct-response marketing

mail, internet, telephone, dread disease, hospital confinement, branching out into other types of insurance. More insurers are using mixed marketing systems including direct-response marketing.

surplus lines insurance

non-admitted insurers provides coverages that would otherwise be unavailable; coverage that cannot be provided by admitted insurer,

mutual insurance company

not-for-profit insurance company owned by policyowners; policyowners vote for board of directors, receive dividends,

demutualization

process of shifting from a mutual insurance company to a stock insurance company

advance premium mutuals

write all but small percentage of mutual insurance, operations resemble stock insurance companies, owned by policyowners and have no stockholders, issue non-assessable contracts, cost of insurance set at beginning of policy, may issue dividends to policyowners,