CH 1. Insurance basic principles

Guaranty Association

All states have established guaranty funds or guaranty associations to support insurers and protect consumers if an insurer becomes insolvent and financially unable to pay its claims. Funded by insurance companies through assessments

Types of insurance companies

1. Private insurance companies (commercial)— offer many lines of insurance. Some sell primarily life insurance and annuities, while others sell accident and health insurance, or property and casualty insurance. 2. Multi-line insurers— companies that sell more than one line of insurance 3. Stock companies (non-participating)- a private organization, organized and incorporated under state laws, for the purpose of making a profit for its stockholders (shareholders). -Structured the same way 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. -a stock company is referred to as a non-participating company because policy holders do NOT participate in dividends resulting from stock ownership. 4. Mutual companies (participating)- they 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. They have the right to vote for members of the board of directors. -by issuing participating policies that pay policy dividends, mutual insurers allow their policy owners to share in any company earnings ( aka divisible surplus) -policy dividends represent a "refund" of the portion of premium that remains after the company has set aside the necessary reserves and has made its 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 policy owners on an annual basis. -mutual companies are sometimes referred as "participating companies" because the policy owners participle in dividends. - occasionally a stock company can be converted into a mutual company through a process called mutulizatioln - likewise, mutual companies can convert to stock companies through a process called "demutualization" -stock and mutual companies often referred to as commercial insurers. They can write life, health, properly and casualty insurance. 5. Assessment mutual companies/insurers- classified by the way in which they charge premiums. -pure assessment mutual company operates on basis of loss-sharing by group members. No premium is payable in advance. Instead each member is assessed an individual portion of losses that actually occur. -advance premium assessment mutual charges a premium at beginning of policy period. If original premium exceeds operating expenses and losses, the surplus is returned to policy holders as dividends. However, if total premiums are NOT enough to meet losses, additional assessments are levied against the members. Normally the amount of assessment that may be levied is limited either by state laws or a provision in the insurers by laws. 6. Reciprocal insurers- similar to mutual, but organized on the basis of ownership by their policyholders. It's the policy holders who insure the risks of the other policyholders. Each policy holder assumes a share of the risk brought to the company by others. They are managed by an attorney-in-fact 7. Lloyd's of London- they are NOT an insurer but rather a group of individuals and companies that individually underwrite insurance. Comparable to the NYSE (NY stock exchange), which provides the arena and facilities for buying and selling public stock. -Lloyd's function is to gather and disperse underwriting info, help associates settle claims and disputes and, through its member underwriters, provide coverages that may otherwise be unavailable in certain areas. 8. Reinsurers- specialized branch of insurance industry because they insure insurer's. Arrangement by which an insurance company transfers a portion of a risk it has assumed to another insurer. -takes place to limit loss any one insurer would Face IF a very large claim becomes due. -company transferring risk is the ceding company; company assuming risk is the reinsurer. - treaty reinsurance— common reinsurance contract between 2 insurance company's, which involves an automatic sharing of risks assumed. - in a reinsurance agreement the company transferring its loss exposure to another insurer is called the primary insurer 9. Captive insurer— insurer established and owned by a parent firm for purpose of insuring the parent firms loss exposure 10. Risk retention group (RRG)- mutual insurance company formed to insure people in the same business, occupation or profession (e.g pharmacist, dentist) 11. Fraternal benefit societies— noted primarily for their social, charitable and benevolent activities. Have memberships based on religious, national, or ethnic lines. - to be characterized as a fraternal benefit society, organization must be a non profit, have a lodge system that includes ritualistic work, and maintain a representative form of govt with elected officers. - fraternal must be formed for reasons other than obtaining insurance. Most issue group and annuities with many of the same provisions found in policies issued by commercial insurers. 12. Industrial insurer— characterized by relatively small face as mounts (usually $1000-$2000 with premiums paid weekly). Sold through a special branch of the industry known as home or debit insurers 13. Service providers- offer benefits to subscribers in return for payment of premiums. Benefits in form of services provided by hospitals and physicians participating in the plan. They sell medical and hospital care services NOT insurance. - HMO is another type of service provider. Provided financing for health care plus health care itself. Stresses preventative health care and early treatment programs -PPO- service provider where a group fearing health care services will obtain price discounts or special services 14. Govt as insurer— federal and state govts are also insurers. Social security and Medicare. Medicaid 15. Self insurers— rather than transfer risk to an insurance company, self insurer establishes its own self funded plan to cover potential losses. Self insurer will look to an insurance company to provide insurance above a certain max level of loss.

Attorney in fact

Administrator of a reciprocal insurer who manages the premiums collected from the groups members

Agents authority to bind an insurer to an insurance contract may be granted in the

Agents contract and the insurance company's appointment.

Lloyd's organzition

Group of individuals and companies that individuals underwrite insurance. Group of insurers that share underwriting duties

Risk retention group

Group owned insurance company formed to assume and spread the liability risks of its members

National association of insurance commissioners (NAIC)

Organization and committee that works regularly to examine various aspects of the insurance industry and to recommend appropriate insurance laws and regulations.

Participating vs non participating companies

Participating companies allow policy holders to receive dividends, whereas non- participating companies do NOT

Dividends from a mutual insurance company are paid to whom

Policy holders.

What outlines the authority given to the producer on behalf of the insurer

Producer contract. Producer or agent contract outlines the authority given to the producer on behalf of the insurer q

Captive insurer

Type of insurer that limits the exposures it writes to those of its owners Insurer that confines or largely limits the exposures it writes to those of its owners

Liquidity

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

telemarketers

The do not call registry was designed to prevent calls from this group

Fair Credit Reporting Act

Authority that requires dose and accurate reporting of info about consumers, including applications for insurance. Insurers must inform applications about any investigations that are being made.

Reserves

Accounting measurement of an insurance company's(aka insurers) future obligations to its policy owners. Classified as liabilities on the insurance company's accounting statements since they must be settled at a future date

Shareholders

A Stock insurance company is owned by its shareholders.

Participating insurance policy

A policy where the policy maker receives dividends deriving from the company's divisible surplus.

Which of the following accurately describes a participating insurance policy

Policy owners may be entitled to receive dividends. A participating insurance policy is one in which the policy owner receives dividends from the company's divisible surplus

Role of life insurance

Provide death benefits. Creates an instant estate regardless of when death occurs

State insurance departments

Regulates an insurer's claim settlement practices

Treaty Reinsurance

Reinsurance contract between two insurers involving an automatic sharing of the risks assumed. Under this treaty, Each party automatically accepts specific percentages of the insurers business.

Policy summary

Contains info about the specific policy being recommended. Identifies the agent, insurer, policy, and each rider. Includes info about premiums, dividends, benefits etc.

Policyholders

Dividends from a mutual insurance company are paid to these people