KEYWORDS: BASIC PRINCIPLES OF INSURANCE

History of Regulation

A brief overview of the history of insurance regulation will show a seesaw between the states' authority and the federal government. Though a balance between these two bodies has been reached and maintained for many years, arguments favoring control by one governing authority over another are still being waged.

Reciprocal Insurer

A Reciprocal Insurer is an unincorporated organization in which all members insure one another.

Foreign Insurer

A Foreign Insurer is an insurer with its principal office or domicile location in a state different from the state it is transacting insurance business.

Risk Retention Group

A Risk Retention Group is a group-owned liability insurer which assumes and spread product liability and other forms of commercial liability risks among its members.

1944-United States v. Southeastern Underwriters Association (SEUA)

The decision of Paul v. Virginia was held for 75 years before the Supreme Court again addressed the issue of state versus federal regulation of the insurance industry. In the SEUA case, the Supreme Court ruled that the insurance industry is a form of interstate commerce. As such, the insurance industry should be regulated by the federal government and subject to a series of federal laws, many of which conflicted with existing state laws. This decision did not affect states' power to regulate insurance, but it did nullify state laws that conflicted with federal legislation. The result of the SEUA case was to shift the balance of regulatory control to the federal government.

Client service

The ethical agent knows that a sale does not mark the end of a relationship with a client, but rather the beginning. 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.

Full and accurate disclosure.

The ethical agent makes it a practice to inform clients about all aspects 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 are highly effective financial planning tools. They should be presented clearly, completely, and accurately.

Personal Producing General Agency System

The personal producing general agency (PPGA) system is similar to the career agency system. However, PPGAs do not recruit, train, or supervise career agents. They primarily sell insurance, although they may build a small sales force to assist them. PPGAs are generally responsible for maintaining their own offices and administrative staff. Agents hired by a PPGA are considered employees of the PPGA, not the insurance company, and are supervised by regional directors.

Broker

A Broker represents themselves and the insured (i.e., the client or customer).

Captive Insurer

A Captive Insurer is an issuer established and owned by a parent firm for the purpose of insuring the parent firm's loss exposure.

Certificate of Authority

A Certificate of Authority is a license issued to an insurer by a department of insurance (or equivalent state agency), which authorizes that company to conduct insurance business in that particular state.

Advertising Code

A principal problem of states in the past was regulating misleading insurance advertising and direct mail solicitations. Many states now also subscribe to the Advertising Code developed by the NAIC. The Code specifies certain words and phrases that are considered misleading and, as such, cannot be used in advertising of any kind. Also required under this Code is the full disclosure of policy renewal, cancellation, and termination provisions.

Reinsurer

A reinsurer is a company that provides financial protection to insurance companies. Reinsurers handle risks that are too large 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.

Actuary

Actuary refers to the person who calculates policy rates, reserves, and dividends and makes other applicable statistical studies and reports. The actuary is concerned about the cost of insurance as a whole or for a specific class of risk.

Any insurance company that fails to comply with this act is liable to the consumer for actual and punitive damages. The maximum penalty for obtaining Consumer Information Reports under false pretenses is $5,000- and 1-year imprisonment

Any insurance company that fails to comply with this act is liable to the consumer for actual and punitive damages. The maximum penalty for obtaining Consumer Information Reports under false pretenses is $5,000- and 1-year imprisonment

Strong Assessment Mutual Insurers

Assessment mutual companies are classified by the way in which they charge premiums. A pure assessment mutual company operates on the basis of loss-sharing by group members. No premium is payable in advance. Instead, each member is assessed a portion of the losses that occur. An advance premium assessment mutual charges a premium at the beginning of the policy period. If the original premiums exceed the operating expenses and losses, the surplus is returned to the policyholders as dividends. However, if total premiums are not enough to meet losses, additional assessments are levied against the members. Typically, the amount of assessment that may be levied is limited either by state law or simply as a provision in the insurer's by-laws

Career Agency System

Career agencies are branches of major stock and mutual insurance companies that are contracted to represent an insurer in a specific area. In career agencies, insurance agents are recruited, trained, and supervised by either a manager-employee of the company or a general agent (GA) who has a vested right in any business written by the GA's agents. GAs may operate strictly as managers, or they may devote a portion of their time to sales. The career agency system focuses on building sales staff.

Private (Commercial) Insurance Companies

Commercial insurers are private companies offering many lines of insurance. Some only sell life insurance and annuities, while others sell only accident and health insurance, or strictly property and casualty insurance. Companies that sell more than one line of insurance are known as multi-line insurers. A company that only sells one line of insurance is a monoline insurer. Stock and mutual companies are can both be considered commercial insurers, and as such, both can write life, health, property, and casualty insurance.

Lloyd's of London

Contrary to popular belief, Lloyd's of London is not an insurer but rather a syndicate of individuals and companies that individually underwrite insurance. Lloyd's can be compared to the New York Stock Exchange, which provides the arena and facilities for buying and selling public stock. Lloyd's 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.

Divisible Surplus

Divisible surplus is the amount of earnings paid to policyowners as dividends after the insurance company sets aside funds required to cover reserves, operating expenses, and general business purposes.

Surplus Lines Insurance

Surplus Lines Insurance is nontraditional insurance only available form a surplus lines insurer. They offer coverage for substandard or unusual risks not available through private or commercial carriers.

Fraternal Benefit Societies

Insurance is also issued by fraternal benefit societies, which have existed in the United States for more than a century. Fraternal societies, noted primarily for their social, charitable, and benevolent activities, have memberships based on religious, national, or ethnic lines. Fraternal first began offering insurance to meet their low-income members' needs, funding the benefits on a pure assessment basis. Today, few fraternal rely on an assessment system; most have adopted the same advanced funding approach other insurers use. 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. Fraternal must be formed for reasons other than obtaining insurance. Today, most fraternal benefit societies issue group insurance and annuities with many of the same provisions found in commercial insurers' policies. Fraternal benefit societies are more concerned about maintaining minimum reserves and surpluses for coverage than providing dividends or profits.

Industrial Insurer

Insurance is also sold through a specialized branch of the industry known as home service or debit insurers. These companies specialize in a particular type of insurance called industrial insurance. Industrial insurance is characterized by relatively small face amounts (usually $1,000 to $2,000) with premiums paid weekly.

Insurer Classification According To Domicile

A domestic insurer has its principal or home office in the state where it is authorized. In other words, an insurance company authorized (admitted to transact insurance business) in the state where it is chartered or incorporated is classified as a domestic insurer only in that state. A foreign insurer is authorized in one state, but its charter or principal office is in another State. An alien insurer is an insurer authorized in any state within the U.S., but its principal office is located outside this country. For instance, Nationwide Insurance Company of Columbus, Ohio, operates as a domestic insurer in the State of Ohio. Nationwide Insurance Company is also licensed or authorized in the State of Illinois. Therefore, it operates throughout the State of Illinois as a foreign insurer. Nippon Life of Tokyo, Japan, or Sun Financial Services of Toronto, Canada, are examples of alien insurers.

Multi-line Insurer

A multi-line insurer is an insurance company or independent agent that provides a one-stop-shop for businesses 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.

Non-admitted Insurer

A non-admitted or unauthorized insurer is an insurer who has not received a certificate of authority from a state's department of insurance authorizing them to conduct insurance business in that state.

Service Providers

Service providers sell medical and hospital care services to their subscribers, not insurance, in return for a premium payment. Benefits are in the form of services provided by the hospitals and physicians participating in the plan. They sell medical and hospital care services, not insurance. These services are packaged into various plans, and those who purchase these plans are known as subscribers. Another type of service provider is a health maintenance organization (HMO). HMOs offer a wide range of health care services to member subscribers. For a fixed periodic premium paid in advance of any treatment, subscribers are entitled to the services of specific physicians and hospitals contracted to work with the HMO. Unlike commercial insurers, HMOs provide financing for health care plus the health care itself. HMOs are known for stressing preventive health care and early treatment programs. The third type of service provider is the preferred provider organization (PPO). Under the usual PPO arrangement, a group desiring healthcare services (e.g., an employer or a union) will obtain price discounts or special services from certain select health care providers in exchange for referring its employees or members to them. PPOs can be organized by employers or by the health care providers themselves. The kind of services provided is spelled out in the contract between the employer and the health care professional (i.e., a physician or a hospital). Insurance companies can also contract with PPOs to offer services to insureds.

Documentation

The ethical agent documents 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. Some documentation is required by state law. Ethical agents know these laws and follow them precisely.

Insured

The insured is the customer receiving insurance protection under an insurance policy.

Rating Services

While not technically insurer oversight, rating services help publicize the financial health of insurers. The financial strength (solvency) and stability of an insurance company are two vitally important factors to potential insurance buyers and insurance companies. The PRIMARY purpose of a rating service company, such as A.M. Best, Fitch Ratings, Standard & Poor's, and Moody's, is to determine the rated company's (the insurer) financial strength. An insurer's financial strength can be evaluated by looking at the companies reserves and liquidity. Reserves are the accounting measurement of an insurer's future obligations to its policyholders. They are classified as liabilities on the insurance company's accounting statements since they must be settled at a future date. Liquidity indicates a company's ability to make unpredictable payouts to policyowners. States require various minimum reserves and liquidity thresholds prior to issuing a certificate of authority and verify these thresholds periodically through an examination of insurer financial records.

Managerial System

With the managerial system, branch offices are established in several locations. Instead of a general agent running the agency, a salaried branch manager is employed by the insurer. The branch manager supervises agents working out of that branch office. The insurer pays the branch manager's salary and pays him a bonus based on the amount and type of insurance sold and the number of new agents hired.

Self-Insurers

A self-insurer establishes a self-funded plan to cover potential losses instead of transferring the risk to an insurance company.

National Association of Insurance Commissioners

All state insurance commissioners or directors are members of the National Association of Insurance Commissioners (NAIC). This organization has committees that regularly examine various aspects of the insurance industry and recommend applicable insurance laws and regulations. The NAIC has four broad objectives: To encourage uniformity among the state insurance laws and regulations. To assist in the administration of those laws and regulations by promoting efficiency. To protect the interests of policyowners and consumers. To preserve state regulation of the insurance business.

Captive Insurer

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.

Fraternal Benefit Society

Fraternal Benefit Societies are nonprofit benevolent organizations that provide insurance to its members.

1970-Fair Credit Reporting Act

In an attempt to protect an individual's right to privacy, the federal government passed the Fair Credit Reporting Act, which is the authority that 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. If any consumer report is used to deny coverage or charge higher rates, the insurer must furnish to the applicant the name of the reporting agency conducting the investigation.

1958-intervention by the FTC

In the mid-1950s, the Federal Trade Commission (FTC) sought to control the health insurance industry's advertising and sales literature. 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.

1959-intervention by the SEC

In this instance, the issue was variable annuities: Is a variable annuity an insurance product that should be regulated by the states or a securities product that should be regulated federally by the Securities and Exchange Commission (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 also regulates variable life insurance.

Industrial Insurer

Industrial Insurers 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.

Lloyds of London

Lloyds of London is NOT an insurer, but a group of individuals and companies that underwrite unusual insurance.

Mutual Insurance Company

Mutual Insurance Companies are insurance companies characterized by having no capital stock, being owned by its policy owners, and usually issue participating insurance.

National Association of Insurance and Financial Advisors/National Association of Health Underwriters

NAIFA (National Association of Insurance and Financial Advisors) and NAHU (National Association of Health 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 organizations created a Code of Ethics detailing the expectations of agents in their duties toward clients.

Participating policies

Participating policies allow policyholders to participate in the company by electing the board of directors and receiving dividends from the divisible surplus. Non-participating policies to not allow to policyholders to participate in elections or dividends and instead aim to increase profit for the shareholders.

Private (Commercial) Insurer

Private or commercial insurance companies are companies owned by private citizens or groups that offer one or more insurance lines. Commercial insurers are NOT government-owned.

Reinsurance

Reinsurance 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.

Reinsurers and Retention Limits

Reinsurers are a specialized branch of the insurance industry because they insure insurers. Reinsurance is an arrangement by which an insurance company transfers a portion of an assumed risk to another insurer. Usually, reinsurance occurs to limit the loss any one insurer would face should a very large claim become payable. Another reason for reinsurance is to enable a company to meet specific objectives, such as favorable underwriting or mortality results. The company transferring the risk is called the ceding company; the company assuming the risk is the reinsurer. The portion of the risk that the ceding insurer retains is called the net retention (or net line). A typical reinsurance contract between two insurance companies is called treaty reinsurance, which 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.

Surplus Lines Insurance

Surplus lines insurance is available to those who need protection, but it is not available through private or commercial carriers. Surplus lines insurance refers to the nontraditional insurance market. A person will seek coverage through a surplus lines broker in order to secure coverage for high, substandard, or unusual risks (i.e., hole-in-one insurance or nonappearance coverage). 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.

Claims Department

The claims department is responsible for processing, investigating, and paying claims.

Insurer

The insurer is the insurance company.

Insurance

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

Alien Insurer

An Alien Insurer in the United States is an insurer whose principal office and domiciled location is outside the country.

Agent Marketing and Sales Practices

Marketing and selling financial products, such as life insurance and annuities, requires a high level of professionalism and ethics. Every state requires its licensed producers to adhere to specific standards designed to protect consumers and promote suitable sales and application of insurance products. Some of these standards include: Selling to needs: The ethical agent determines the client's needs and then determines which is best suited to address those needs. Two principles of needs-based selling include finding the facts and educate the client. 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 understand the product and its provisions? Does the client have the capability, financially and otherwise, to manage the product? Is this product in the client's best interest?

How Insurance is Sold

Most consumers purchase insurance through licensed producers who present insurers' products and services to the public via active sales and marketing methods. Insurance producers may be agents, who represent a particular company, or brokers, who are not tied to any particular company and can represent many insurers' products. In most states, brokers and agents must be contracted and appointed with an insurer prior to taking an application for the insurer. An agent has an agent's contract; a broker has a broker's contract. This contract and appointment with the insurance company are what grant the agent (or broker) authority to bind an insurer to an insurance contract. In a sales transaction, agents represent the insurer, and brokers represent the buyer. In any dispute between the insured or beneficiary and the insurer, the agent who solicits an insurance application represents the insurer and not the insured or beneficiary. Agents are also classified as captive or career agents and independent agents. A captive or career agent works for one insurance company and sells only that company's insurance policies. An independent agent works for himself and sells the insurance products of many companies. In most states, the agent may represent as many insurers as will appoint him. There are three systems that support the sale of insurance through agents and brokers. These are the career agency system, personal producing general agency system, and independent agency system.

Key People Within an Insurance Company Producers

Producer refers to the full range of individuals who solicit insurance products to the public. The various types of producers include (1) Agents who represent the insurer which sponsors them; (2) Brokers who represent themselves and the insured (i.e., the client or customer); (3) Solicitors who represent and solicit insurance on behalf of an agent; and (4) Service Representatives who are employees of an insurer. Service representatives who do not engage in sales activities that pay commissions need not be licensed. If commissions are paid, the recipient must possess an insurance license. Any person who solicits or countersigns policies or collects premiums from policyowners must be licensed in most locales. Licensed producers are obligated to act in a fiduciary capacity on behalf of the insurers with which they place insurance business and the clients they represent in insurance transactions. Producers are typically considered to be part of the sales department.

Reciprocal Insurers

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

Actuarial department

The actuarial department calculates policy rates, reserves, and dividends.

Independent Agency System

The independent agency system, a creation of the property and casualty industry, does not tie a sales staff or agency to any one particular insurance company. Instead, independent agents represent any number of insurance companies through contractual agreements. They are compensated on a commission or fee basis for the business they produce. This system is also known as the American agency system.

Evolution of Industry Oversight

The insurance industry is regulated by a number of authorities, including some inside the industry itself. The primary purpose of this regulation is to promote the public welfare by maintaining insurance companies' solvency. Other purposes are to provide consumer protection and ensure fair trade practices and fair contracts at fair prices. It is essential that insurance agents understand and obey the insurance laws and regulations.

Underwriter

Underwriter refers to the person who identifies, assesses, examines, and classifies the amount of risk represented by an applicant (proposed insured) to determine if coverage should be provided and, if so, at what cost (premium). An underwriter approves or declines insurance applications and determines the cost to provide insurance.

Claim Settlement Practices

While specific time frames may vary from state to state, all states require prompt, fair, and equitable claim settlement practices

Domestic Insurer

A Domestic Insurer is an insurer with its principal or home office in a state where it is authorized.

Nonparticipating policy

A nonparticipating insurance policy, typically issued by stock companies, do not allow policyowners to participate in dividends or electing the board of directors.

Participating Plan

A participating plan is an insurance policy under which the policyowners share in the company's earnings through receipt of dividends and also elect the company's board of directors.

Risk Retention and Risk Purchasing Groups

A risk retention group (RRG) is a mutual insurance company formed to insure people in the same business, occupation, or profession (e.g., pharmacists, dentists, or engineers). These group-owned liability insurers assume and spread product liability and other forms of commercial liability risks among its members. This type of group is formed for the primary purpose of retaining or pooling risks. Risk retention groups are licensed in their state of domicile and are owned by their policyholders, who are business owners (who are also the shareholders). Once these groups are organized, they can offer membership to others who possess similar risks. A risk retention group or risk purchasing group only has to be licensed in one state but may insure members in any State.

Adjuster

An insurance adjuster is a person who engages in investigative work to obtain information for adjusting, settling, or denying insurance claims. An insurance adjuster will primarily use claim forms, but depending on the claim, may also be involved with investigations into an insured's identity, habits, conduct, business, occupation, honesty, integrity, or credibility, etc. A public adjuster refers to a person who, for compensation, acts on behalf of or aids an insured with settling an insurance claim.

Underwriting Department

The underwriting department is the department within an insurance company responsible for reviewing applications, approving or declining applications, and assigning risk classifications.

Mutual Companies - Participating

Mutual insurance companies are also organized and incorporated under state laws, but they have no stockholders. Instead, the owners are the policyholders. Anyone purchasing insurance from a mutual insurer is both a customer and an owner. He has the right to vote for members of the board of directors. Mutual companies are referred to as participating companies because the policyowners participate in dividends. By issuing participating policies that pay policy dividends, mutual insurers allow their policyowners to share in any company earnings (divisible surplus). The divisible surplus is the amount of earnings paid to policyowners as dividends after the insurance company sets aside funds required to cover reserves, operating expenses, and general business purposes. Essentially, 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. Policy dividends can also include a share in the company's investment, mortality, and operating profits. Surpluses are typically distributed to policyowners on an annual basis. Occasionally, a stock company may be converted into a mutual company through a process called mutualization. Likewise, mutual companies can convert to stock companies through a process called demutualization. In the rare case of a stock insurance company issuing both participating and nonparticipating policies, the company is referred to as using a mixed plan.

Stock Insurance Company

A stock company is an insurance company owned and controlled by a group of stockholders (or shareholders) whose investment in the company provides the safety margin necessary in the issuance of guaranteed, fixed premium, nonparticipating policies.

Stock Companies - Nonparticipating

A stock insurance company is a private organization, organized and incorporated under state laws for the purpose of making a profit for its stockholders (shareholders). It is structured the same as any corporation. Stockholders may or may not be policyholders. When declared, stock dividends are paid to stockholders. In a stock company, the directors and officers are responsible to the stockholders .Stock insurance companies issue nonparticipating insurance policies. Nonparticipating insurance policies do not allow policyholders to participate in the company's profits (i.e., receive dividends). As opposed to passing savings on to policyholders, stock companies look to grow their earned surplus or post-tax earnings not paid in dividends. Earnings retained by a company are considered equity and, as such, are owned by the shareholders. Nonparticipating insurance policies also do not allow policyholders to participate in electing the company's board of directors.

1994-United States Code (USC) Sections 1033 and 1034

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. The Fraud and False Statements federal law makes it illegal to lie, falsify, or conceal information (orally or in writing) from a federal official. As it applies to insurance, any person engaged in interstate insurance business who engages in intentional unfair or deceptive insurance practices or overvalues an insurance product in a financial report or document presented to a regulatory official, will violate federal law. Other violations include but are not limited to embezzling money from an insurance company, misappropriating insurance premiums, and writing threatening letters to insurance offices. The punishment for violation is a fine of up to $50,000, imprisonment up to 15 years, and license revocation. An individual convicted of a felony involving dishonesty may engage in insurance business ONLY after receiving written consent from the state insurance regulatory agency and a 1033 waiver.

State Guaranty Associations

All states have established guaranty funds or guaranty associations to support insurers and protect consumers if an insurer becomes insolvent. Should an insurer be financially unable to pay its claims, the state guaranty association will step in and cover the consumers' unpaid claims up to a specific amount. Insurance companies fund each state association through assessments. While policyowners are offered specific protections under the state guaranty association, producers are prohibited from using these protections in their sales presentations. State Guaranty Associations (or funds) are funded by insurance companies through assessments and exist to protect consumers if an insurer becomes insolvent.

Admitted Insurer

An admitted or authorized insurer is an insurer who has received a certificate of authority from a state's department of insurance authorizing them to conduct insurance business in that state.

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.

Unfair Trade Practices Act

Most jurisdictions have adopted the NAIC's Unfair Trade Practices Act. This act gives the head of each state insurance department power to investigate insurance companies and producers, to issue cease and desist orders, and to impose penalties. The act also gives officers the authority to seek a court injunction to restrain insurers from using any methods believed to be unfair. The context of unfair trade practices is misrepresentation and false advertising, coercion and intimidation, unfair discrimination, and inequitable administration of claims settlements.

Private Versus Government as Insurer

Private citizens or groups own private or commercial insurance companies. They may be proprietary or cooperative. An example of a proprietary insurer would be a profit-motivated stock company. Private insurers offer individual, group, industrial, or blanket insurance policies. Federal and state governments are also insurers. Insurance provided by federal and state governments is commonly called social insurance programs. Social insurance programs range from crop insurance to bank and savings and loan deposit insurance. Government insurers are owned and operated by a Federal or State entity. Government insurers may either: (1) write insurance to cover perils that are not insurable by commercial insurers (i.e., war, flood, a nuclear reaction) or (2) write insurance on risks that are insurable and thus compete with the commercial marketplace (i.e., Social Insurance such as Workers' Compensation). Government insurers generally write insurance to cover catastrophic perils (i.e., flood) or to protect a segment of society (i.e., the elderly) against catastrophic medical costs (i.e., Medicare). These programs have far-reaching effects, with millions of people relying on these plans. Additional examples of social insurance programs include: Old-Age, Survivors, and Disability Insurance (OASDI), commonly known as Social Security. Social Security Hospital Insurance (HI) and Supplemental Medical Insurance (SMI), commonly known as Medicare. Medicaid Serviceman's Group Life Insurance (SGLI) and Veteran's Group Life Insurance (VGLI) National Flood Insurance Program, and Federal Crop Insurance Corporation As you can see, the government plays a vital role in providing social insurance programs. These programs pay billions of dollars in benefits every year and affect millions of people.

Producer Responsibilities

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 with all current insurance regulations. Responsibilities include: To help all insurance company customers with the best service possible. To solicit new business for the company they represent by assisting clients in the process of acquiring products from application to policy delivery. This responsibility includes the requirement of being extremely knowledgeable about all company products and services. Guide customers to the right products to meet their actual needs and maintain such a relationship regularly. Build a more substantial business for the company by keeping current customers satisfied and actively seeking referrals for new business. Diligently assist in the claims process, keep customers apprised of continuing developments with any claims, and help assure a prompt and equitable claims experience. 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.

1945-The McCarran-Ferguson Act.

The turmoil created by the SEUA case prompted Congress to enact Public Law 15, the McCarran-Ferguson Act. 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. This act led each state to revise its insurance laws to conform to the federal laws. Today, the insurance industry is considered to be state regulated. Any person who violates the McCarran-Ferguson act faces a fine of $10,000 or up to one year in jail.

1868-Paul v. Virginia

This case, which the U.S. Supreme Court decided, involved one state's attempt to regulate an insurance company domiciled in another state. The Supreme Court sided against the insurance company, ruling that the sale and issuance of insurance is not interstate commerce, thus upholding states' right to regulate insurance.

Self-Insurers

Though self-insurance is not a method of transferring risk, it is an important concept to understand. 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-insurance for funding pension plans and some health insurance plans. A self-insurer will often look to an insurance company to provide insurance above a specified maximum loss level. The self-insurer will bear the amount of loss below that maximum amount.

Departments within an Insurance Company

Throughout this course, you will see references to different departments within an insurance company. The marketing or sales divisions are responsible for increasing the number of prospective applicants, thereby increasing the number of insureds, through various advertising mediums. The sales department is typically the department completing the application and 1-1 appointments with prospective buyers. The underwriting department is responsible for reviewing applications, conducting investigations to gain additional information about applicants, assigning risk classifications, and approving or declining an application. The claims department is responsible for processing, investigating, and paying claims for losses incurred by insureds. The actuarial department calculates policy rates, reserves, and dividends and makes other applicable statistical studies and reports focusing on morbidity and mortality tables.

Buyer's Guides and Policy Summaries

To help ensure that prospective insurance buyers select the most appropriate plan for their needs and to improve their understanding of basic product features, most states require agents to deliver a buyer's guide to consumers whenever they solicit insurance sales. These guides explain the various types of life insurance products (including variable annuities) in a way that the average consumer can understand. In addition, a policy summary containing information about the specific policy being recommended must be given to a potential buyer. It identifies the agent, the insurer, the policy, and each rider. It also includes information about premiums, dividends, benefit amounts, cash surrender values, policy loan interest rates, and life insurance cost indexes of the specific policy being considered. Most states require this to be done before the applicant's initial premium is accepted. The policy summary also contains cost indexes that help the consumer evaluate the suitability of the recommended product. The net payment cost comparison index gives the buyer an idea of the policy's cost at some future point in time compared to the death benefit. The surrender cost comparison index compares the cost of surrendering the policy and withdrawing the cash values at some future time.

Other Methods of Selling Insurance

While most insurance is sold through agents or brokers under the systems previously described, a large volume is also marketed through direct selling and mass marketing methods. With the direct selling method, the insurer deals directly with consumers by selling its policies through vending machines, advertisements, or salaried sales representatives. No agent or broker is involved. A large volume of insurance is also sold through mass marketing techniques, such as over the Internet, newspaper, magazine, radio, and television ads. Mass marketing methods provide exposure to large groups of consumers, often using direct selling methods with occasional follow-up by agents. *Career Agencies recruit, train, and supervise agents through managers or general agents. They primarily build staff. *Personal Producing General Agencies (PPGA) do not recruit, train, or supervise agents. They primarily sell insurance. *Independent agents (American Agency System) represent any number of insurance companies through contractual agreements.