License Coach Notes and Definitions

Indemnity

(Amount) To restore a financial loss to the state prior to the occurrence of the loss. Insurance that compensates the beneficiaries of the policies for their actual economic losses, up to the limiting amount of the insurance policy. The term indemnity means "to make whole." Insurance policies agree to provide payment of benefits to restore the insured's economic loss. For health insurance, the policy agrees to indemnify the insured for the financial loss caused by accident, illness or disability. If the medical bill for repairing a broken arm is $1,500, to which the health policy agrees to cover the full amount, the insurer will pay $1,500; however, the insurer will not pay $2,000 which would result in a $500 profit. Insurers require proof of loss to avoid overpaying an insured for a loss. Life insurance is intended to ward off financial hardship that may result due to a person's premature death. An insured's earning potential or dependents' needs is used to determine the amount of money required to pay final bills and keep any dependents financially stable in the event of an untimely death.

Distribution Systems

* Agents work on behalf of Insurersl. Captive and Career * Brokers do not work for any partcular insurer; i.e. may work for several

Agency System Types

* Career Agency System * Personal Producing General Agency System (PPGA) * Independent Agency System non-exclusive, may switch client's policies * Managerial System Branch manager are reporting agents (Aflac?) * Mass Marketing Media, Franchise, non-insurance sponsors e.g. bank credit card protection

Classifications of Risk

* Financial - As the name implies, financial risks deal strictly with the potential for monetary loss. Insurance deals with financial risks. * Nonfinancial - Nonfinancial risks are all the non-monetary situations that have a potential for loss. One example of a nonfinancial risk is a blind date. * Static - Static risks are independent of changes to the economy and are more consistent over time. A static loss may be an unintended change in ownership due to theft, destruction of an asset or a result of human error. * Dynamic - Dynamic risks are caused by a changing economy, and include changes in product price, purchasing trends and technology. Dynamic risks typically result in gain and societal advancement. * Fundamental - Fundamental risks involve an entire population or group of people, and include risks that everyone may be susceptible to, such as natural disasters, war or unemployment. Because fundamental risks are not the fault of individuals, society is held to deal with them. Most often, the government provides insurance for fundamental risks, such as national flood insurance. * Particular - Particular risks are specific to individuals and are often managed through insurance. * Speculative - Speculative risks present a potential for loss or gain and are not covered by insurance policies. Examples of speculative risks are investing in the stock market, placing bets on race horses and gambling. * Pure - Pure risks present a potential for loss only, not gain. Pure risk is the type of risk that is insurable. Examples of pure risk include the possibility of financial loss caused from accident, illness, and death. It is true that not every pure risk is an insurable risk; however, insurance only covers pure risks.

Elements of Insurable Risk

* Loss must occur by chance or accident * Loss is definite and measurable * Loss must be predictable * Large number of similar units * Loss exposures must be chosen randomly * Loss must be significant causing economic hardship * Loss must not be catastrophic

Derogation

* an exemption from or relaxation of a rule or law. e.g. "the massive derogation of human rights" * the perception or treatment of someone as being of little worth. e.g. "the derogation of women"

12 exemptions overriding individual consent

1 On a "need to know" basis within an agency. 2 Disclosures required by the Freedom of Information Act. 3 For routine uses within an agency. 4 For the Bureau of the Census to perform a census or survey. 5 If used strictly for statistical research or reporting record. 6 To the National Archives and Records Administration as a record which has sufficient historical or other value. 7 A request made by law enforcement. 8 For circumstances affecting the health or safety of an individual. 9 To Congress. 10 To a general accounting office. 11 Court-ordered. 12 To a consumer reporting agency (debt collection).

Elements of a Legal Contract

1, Offer and acceptance Applicant makes an offer to insurer with a completed application and premium payment 2. Consideration Exchange of value between parties to the contract. 3. Competent parties All parties must be of legal competence, age, mental capacity Beneficiaries and insureds are not parties to the contract 4. Legal purpose Legal and not in opposition to public policy

Authorized Insurers

Admitted, Licensed Received Certificate of Authority

Invitation to Offer/Counter Offer

Agent submits application without initial premium or insurance company issues the policy with modified coverage or premium (i.e. insurer can modify after initial premium is paid to agent) Optional Component NOT an agreement

Independent Insurance Agents

Agents that are appointed to work for several insurers non-exclusively. Do they own the policies they sell? (Quiz thinks so)

Competent parties/Element of a Legal Contract

All parties must be of legal competence, age, mental capacity Beneficiaries and insureds are not parties to the contract One of the four required elements of a contract

Domestic Insurer

An insurer that conducts business in the state, district or commonwealth in which it was incorporated.

Methods of Handling Risks Misrepresentation

Any written or oral statement that does not accurately describe a policy's benefits, conditions, or coverage is considered a misrepresentation. A misrepresentation is simply a lie. Any statement representing a health discount plan (HMO) as a form of insurance is a misrepresentation. Relating only the benefits and not including a description of conditions or limitations is misrepresenting the policy. Suggesting a policy is better suited for a prospective applicant than the facts would indicate to a reasonable person is misrepresentation. Statements are deemed to be misrepresentations if, when taken in the context of the whole presentation, they may tend to mislead or deceive a person. It is illegal to make any misleading representations or comparisons of companies or policies to insured persons to induce them to forfeit, change or surrender their present insurance.

Consumer Report

Any written, oral, or other communication of information by a consumer reporting agency about a consumer's credit worthiness, character, general reputation, personal characteristics or mode of living which are used to determine a consumer's eligibility for credit, insurance, employment, or other authorized purposes. Consumer reports are reports about the characteristics of an individual, including the individuals general character and reputation, employment history, living arrangements, and credit worthiness.

Hazard

Anything that increases the chances of a loss

Assessment insurers

Assess policyholders a premium when losses are incurred. Some assessment insurers only collect premiums when losses are incurred, while others collect advance premiums and additional premiums as necessary if losses cannot be sufficiently covered by the advance premium.

Churning

Churning is the practice of using misrepresentation to induce a policyholder to replace a policy issued by the insurer the producer represents, rather than the policy of a competitor. The objective of churning is to allow the producer to collect a large first-year commission on a new policy. Whereas twisting involves the policies and revenues of another insurer, churning occurs within the same company. Churning is the result of a producer putting his own interests above those of the client and the company for whom he is an agent.

Concealment

Concealment is withholding information material to the risk. Insurers may void policies if the concealment is intentional and material to the risk.

Consumer Reporting Agencies

Consumer reporting agencies compile and maintain credit information about consumers nationwide, and issue credit reports to third parties who have a valid business need for the information. Consumers have the right to request removal of their name and address from lists provided to consumer reporting agencies for any consumer report that was not commenced by a credit or insurance transaction of the consumer. Credit reporting agencies must provide consumers with a way to notify agencies that they do not want their information used. This includes providing consumers with a toll-free number to call. Consumers notifying agencies by phone can request a two-year hold on information; however, if a request is made in writing, the hold on information is permanent unless withdrawn by the consumer.

Aleatory Contract

Contracts that allow an unnequal exchange of value+

Ambiguities in a Contract of Adhesion

If there is any ambiguity in the terms of the insurance contract, the courts will rule in favor of the insured because the contract is written by the insurer, to which the insured adheres. Insurers strive to use plain language in the contract to prevent the need for interpretation by the courts.

Capital Stock Insurers

Incorporated companies owned by their stockholders

Home Service Insurance

Industrial insurance sold by home service or debit insurance companies. Face amounts are small, usually $1,000 to $5,000. Premiums are paid weekly or monthly.

Agency

Insurance distribution system that uses producers to transact insurance.

Brokers

Insurance producers who represent the insured or purchaser of insurance, not the insurer. They work for several different insurers.

Agents

Insurance producers who represent the insurer, not the insured. Cannot bind insurance except property and casualty

Government Insurance

Insurance which provides protection against fundamental risks by redistributing income to help people who cannot afford to pay the cost of incurring such losses themselves After private insurers, the second main group of insurers. aka Social Insurance Several types. In terms of life and health insurance, most people are familiar with Social Security and Medicare. Social Security is also known as OSADI, or Old Age, Survivors' and Disability Insurance, which provides disability income, survivor benefits and retirement benefits. Medicare is part of the Social Security program, and provides medical benefits to qualifying people age 65 and older. Another medical insurance program subsidized by both the federal and state governments is Medicaid, which provides health care to impoverished people. The government has also provided military, federal and state employees with a variety of life and health insurance programs including Servicemen's Group Life Insurance, CHAMPUS, and TRICARE. Railroad employees are eligible for federal insurance through the Railroad Retirement Act. Federal government insurance for catastrophic risks includes National Flood Insurance, War Risk Insurance, and Federal Crop Insurance. State government insurance includes unemployment insurance, workman's compensation and SCHIP, or State Children Health Insurance Programs.

Coinsurance

Insurer and insured each pay a percentage, insurere's percentage is usually larger.

Catastrophic

Insurer can not bear the cost of covering the loss

Insuring clause

Insurer promises to pay if premiums are current, often on policy face

Alien Insurer

Insurer that conducts business in a country where it is not incoroporated.

Forieign Insurer

Insurer that conducts business in a state where it is not incorporated

Excess and Surplus Lines

Insurers that insure risks that traditional insurers will not insure due to the nature or amount of coverage of the risk, of do not have a market to insure Not subject to the rate and form laws that standard market insurers are subject to, which means the insurer can offer flexible coverages without needing to file rates and forms with the state insurance department. An example of an excess and surplus lines insurer is XL Insurance.

Investigative Consumer Reports

Investigative Consumer Reports contain information on a consumer's character, general reputation, personal characteristics, or mode of living but are obtained through personal interviews with neighbors, friends, or associates of the consumer. Investigative consumer reports do not use credit information from creditors, credit records, or credit reporting agencies. Consumers must be informed that they have the right to request additional information about the report; such information must be provided to consumers within five days if requested.

Casualty Insurance

It is a form of insurance, which protects against the risk of legal liability for injury, death, disability, damage and destruction to property aka Liability Insurance?

False Financial Statements

It is a violation of unfair marketing practices of any person to deliberately make a false financial statement regarding the solvency of an insurer with the intent to deceive others

Life Insurance

It is designed to protect against the risk of premature death.

Legal purpose/Element of a Legal Contract

Legal and not in opposition to public policy One of the four required elements of a contract

Contract

Legally binding agreement between 2 or more parties where promise of benefits is exchanged for value

Avoidance

Method of handling risk in which a person intentionally steers clear of exposure to a risk. e.g. avoid travel in airplane

Agreement Component

Must contain offer and acceptance

Dividends

Payments a corporation makes to shareholders from the company's earnings also A return of overcharged premium, which is not taxable.

Insured

Person covered under the policy

Basic Components of Insurance Contracts

Policy face, title page * The named insured * Policy number * Policy issue date * Policy limits * Premium amount * Premium due dates * A right of examination statement (right to return the policy) * Signatures of the insurer's secretary and president are also part of the policy face

3 most important principles of insurance

The three most important principles of insurance are: risk pooling, the law of large numbers, and insurable interest

Limit of Liability

The total amount the insurer will pay for an insured risk.

Independent Rating Services

They are credit rating agencies that rate or

Noninsurance Sponsors

They issue insurance policies but are not insurers themselves. These include financial institutions including the banking and credit issuing companies.

Demutualization

Transformation of a mutual insurer into a stock insurer.

Loss

Unintentional decrease in value of an asset due to a peril.

Consumer Reports Prohibited Information

Unless applying for a life insurance policy of $150K or more, reports can not include * Bankruptcies dating back more than 10 years * Civil suits and judgments dating back more than seven years or in cases which the statute of limitations has expired, whichever period is longer * Tax liens dating back more than seven years * Adverse information dating back more than seven years * Reports of a consumer's arrests, indictments or convictions

Exclusions

What the insurer will not do

Boycott, coercion, and intimidation

What these have in common is bullying: they use power unethically and unprofessionally to attempt to force a company or individual to behave in a certain way. The difference is the means used to get the desired result. Coercion and intimidation are more general and may employ a variety of means. Coercion generally manipulates through the prospect of something desirable. An agentâs subtly suggested offer to recommend the prospective client for membership in a selective club if the person purchases a particular policy is coercive, for instance. Intimidation manipulates through the threat of a negative result â the loss of business or the denial of coverage, for instance. A boycott is a form of intimidation in which an individual or group refuses to do business with a company or individual, either to drive them out of business or to force them to act in certain way. All states have laws forbidding these practices. For instance, some states specify that no person may require, as a condition to a loan or credit extension, that the obligee purchase an insurance policy through any particular. Others specify that no person may require, as a condition to a loan or credit extension, that the obligee purchase an insurance policy through any particular person. All have laws stating simply thatit is illegal to commit or agree to commit any act of boycott, coercion, or intimidation that results in a monopoly in the insurance business.

Career agents

Work for only one insurer - synonymous with captive producer and exclusive agent.

GrammLeachBliley Act (GLBA)

a.k.a. Financial Services Modernization Act of 1999 Removed barriers in the market among banking companies, securities companies and insurance companies Repealed GlassSteagall Act of 1933

Lingering Implied Authority

agent still has brochures and materials but no agency authorization - a scam?

Express authority

authority granted to the agent by the principal as written in the agency contract

Errors and Omissions/Personal Liability Insurance

can be purchased - why is it needed should not insurance company defend its agents

Controlled Business

coverage written on producer or agent's own behalf- is strictly limited typically, an agent must write at least half of his/her own business with non-controlled sources

McCarran Ferguson Act/ Public Law 15

feds won't intervene if state handles insurance complaint adequately (1945)

Insurable Interest

individual must have a valid concern for health, life, or well-being of insured valid if * purchaser == insured * marriage or blood relationship * business partners * creditor-debtor

Apparent authority

insurer<->agent<->customer insurer gives impression agent can bind the principal when, in fact, he/she has no such authority

Exposure Unit

item insured in the policy economic value of the life and well-being of the insured individual. In life insurance, precisely the dollar value of the life insurance policy. Exposure units are the basis for determining premium rates and are usually represented in units or dollars.

Insurance Contract

legal agreement between insurance company and indivdual (possibly a group?)

Inside Limits

limits placed on certain medical coverages within a policy

Indemnify

make whole

Market Conduct Examination

non-financial investigation conducted by a state's insurance department used to establish authority

Implied authority

not explicitly expressed by the principal but implicit in the agent's duties, e.g. collecting premiums

Contract of Adhesion

one author - the insurer - insurance policies are "take-it-or-leave-it" because insurer dictates all terms in advance

Mortality

rate at which people die

Morbidity

rate at which people get sick

Conditions

rights and resonsibilities of all parties to the contract

FTC Intervention

supreme court asserted McCarran-Ferguson prohibits fed control of insurance FTC can not control insurance (1958)

Annuity

A contract which protects against the risk of living longer than expected. They provide a guaranteed life income to protect against the risk of depleting retirement funds.

Lloyd/Lloyd's Associations

A market where individuals and groups gather to exchange insurance - corporations that advertise and market the financial services of an association of underwriters Lloyd's Associations, or simply Lloyd's, are loosely grouped as private insurers even though they are not technically insurance companies. Lloyd's are better described as a market where individuals and groups gather to exchange insurance, much like stock exchanges provide a place to buy, sell and trade stocks. Lloyd's are corporations that advertise and market the financial services of an association of underwriters. Origin of Insurance (groups meeting in coffee bars)? Primarily reinsurance

Disability

A medical condition, whether physical or mental, resulting from accident or sickness preventing a person from being able to work.

Fiduciary

A person in a position of financial trust and responsibility. Producers are fiduciaries No commingling of personal and insurance funds

Defamation

Defamation is any false, maliciously critical, or derogatory communication â written or oral â that injures anotherâs reputation, fame, or character. Both individuals and companies can be defamed. Unethical producers practice defamation by spreading rumors or falsehoods about the character of competing producers or about the financial condition of another company. Most state insurance regulations state that no person or company may make, publish, or circulate an oral or written statement or circulate literature that is false, maliciously critical, or derogatory to the financial condition of any insurer or that is calculated to injure anyone engaged in the insurance business.

Market Conduct

Ethical code describing how insurers and producers handle business

Consideration/Element of a Legal Contract

Exchange of value between parties to the contract One of the four required elements of a contract

Fraud

Fraud is an intentional misrepresentation or concealment of material fact made by one party in order to cheat another party out of something that has economic value. Impersonation falls under the definition of fraud. Whether a person has committed fraud is a question to be determined by a court of law. The court will look at all the factors involved, including whether the concealed statement or misrepresentation was intentional or was material. Misrepresentation and concealment are not always fraudulent. Fraud is committed when such misrepresentation or concealment material to the risk is committed for the purpose of unjust economic gain. Each act of fraud is punishable by a civil fine up to $50,000 and imprisonment up to 10 years.

Medicare

Government health insurance coverage for individuals over the age of 65, and special needs individuals.

Law of Large Numbers

Guesstimates are more accurante over large numbers of people (samples)

Credit Insurance/Credit Health Insurance

Health coverage used to insure a debt. If a debtor becomes disabled, payments are made to a creditor until the insured can resume work.

Franchise

Health plans that cover a small group of individuals; however, unlike group insurance each individual is issued an individual policy.

Fraternal Benefit Societies

Special types of mutual insurers/ nonprofit religious, ethnic or charitable organizations that provide insurance solely to their members

Medicaid

State and federally-funded medical assistance program for financially disadvantaged individuals.

Guarantee Association

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. Guaranty associations protect the insurer, which in turn protects the insured. All life, health and annuities insurers within a state are required to be a member of the state guaranty association, unless exempt (i.e. fraternal benefit societies and nonprofit insurers). There is a dollar limit to how much a guaranty association will pay per policy and per insured. Each state has their own set of limits, such as $200,000 for life insurance death benefits, $100,000 for life insurance cash surrender and $100,000 for health insurance benefits. Insurance producers are not permitted to use the existence of a state guaranty association to induce a sale of insurance or annuities.

Adverse Selection

Tendency for poorer than average risks to seek insurance.

Fair Credit Reporting Act

The Fair Credit Reporting Act (FCRA) was passed in 1970 with the purpose of regulating the way credit information is collected and used. The Act requires consumer reporting agencies to implement policies and procedures to preserve the confidentiality, accuracy, relevance, and appropriate utilization of consumer's private credit information. The Federal Trade Commission (FTC) administers the FCRA. (1970)

National Association of Insurance Commissioners (NAIC)

The NAIC is a membership association of state insurance commissioners. The purpose of the organization is to advance the uniformity of regulation between states in insurance matters without encouraging the imposition of federal regulation. The NAIC does not have legal authority, but has done much to promote the standardization of insurance laws and regulations among the states including the model laws for individual accident and sickness policy provisions, standard valuation laws, and nonforfeiture benefits.

Deductible

The amount the insured must pay before the insurer will pay for a health insurance claim

Exposure

The condition of being prone to loss due to a hazard or uncertain event

Claim

The insured's notification to the insurer that a payment is requested for a covered loss.

Ceding Company

The insurer that gives the risk to the reinsurer. Also termed primary insurer.

Expenses

The insurer's costs which include: acquisition costs, staff salaries, rent, contingency funds, and claims payments. Why isn't this called overhead.

Insurer as Principle

The law of agency states that the acts of an insurance agent are deemed the acts of the insurer.

Law of Agency

The law of agency states that the insurer is the principal in the agent-insurer relationship.

Estoppel

The legal process of preventing one party from reclaiming a right that was waived. For example, an insurer that waives the right to exclude death caused by involvement in war cannot later go back and reaffirm the right. The insurer is said to be estopped from reasserting the waived right.