Chapter 1: Basic Principles

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 certain 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.

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. If any consumer report is used to deny coverage or charge higher rates, the insurer must furnish tothe applicant the name of the reporting agency conducting the investigation. Any insurance company that fails to comply with this act is liable to the consumer for actual and punitive damages.

Risk Retention Group

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).

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 work regularly to examine various aspects of the insurance industry and to recommend appropriate insurance laws and regulations. The NAIC has four broad objectives: 1. To encourage uniformity in state insurance laws and regulations 2. To assist in the administration of those laws and regulations by promoting efficiency 3. To protect the interests of policyowners and consumers 4. To preserve state regulation of the insurance business

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 GAs 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 staffs.

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. By issuing participating policies that pay policy dividends, mutual insurers allow their policyowners to share in any company earnings. Essentially, policy dividends represent a "refund" of the portion of premium that remains 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.

Reinsurers

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 a risk it has assumed to another insurer. Usually, reinsurance takes place 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 certain 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. A common reinsurance contract between two insurance companies is called treaty reinsurance, which involves an automatic sharing of the risks assumed.

Reserves

Reserves are the accounting measurement of an insurer's future obligations to its policyholders.

Service Providers

Service providers offer benefits to subscribers in return for the payment of a premium. 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.

Reciprocal Insurers

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

1999-Financial Services Modernization Act

The Glass-Steagall Act of 1933, which barred common ownership of banks, insurance companies, and securities firms and erected a regulatory wall between banks and nonfinancial companies, came under repeated attack in the 1980s. In 1999 Congress passed the Financial Services Modernization Act, which repealed the Glass Steagall Act. Under this new legislation, commercial banks, investment banks, retail brokerages, and insurance companies can now enter each other's lines of business

preferred provider organization (PPO)

Under the usual PPO arrangement, a group desiring health care 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 contract between the employer and the health care professional, whether physician or a hospital, spells out the kind of services to be provided. Insurance companies can also contract with PPOs to offer services to insureds.

Private Insurance Companies - Commercial

Commercial insurers offer many lines of insurance. Some sell primarily life insurance and annuities, while others sell accident and health insurance, or property and casualty insurance. Companies that sell more than one line of insurance are known as multi-line insurers.

1868-Paul v. Virginia

This case, which was decided by the U.S. Supreme Court, 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 the right of states to regulate insurance. The Paul v. Virginia ruled that the sale and issuance of insurance is not interstate commerce, thus upholding the right of states 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 its own self-funded plan to cover potential losses. Self-insurance is often used by large companies for funding pension plans and some health insurance plans. Many times a self-insurer will look to an insurance company to provide insurance above a certain maximum level of loss. The self-insurer will bear the amount of loss below that maximum amount.

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. 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. A stock company is referred to as a nonparticipating company because policyholders do not participate in dividends resulting from stock ownership.

State Guaranty Associations

All states have established guaranty funds or guaranty associations to support insurers and to 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. These state associations are funded by insurance companies through assessments.

Government as Insurer

As noted at the beginning of this unit, federal and state governments are also insurers, providing what are commonly called social insurance programs. Ranging from crop insurance to bank and savings and loan deposit insurance, these programs have far-reaching effects. Millions of people rely on these plans. The major difference between the two is that the government programs are funded with taxes and serve national and state social purposes. Social insurance programs include the following: ►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

Lloyd's of London

Contrary to popular belief, Lloyd's of London is not an insurer but rather an association 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.

1958-lntervention by the FTC

In the mid-1950s the Federal Trade Commission (FTC) sought to control the advertising and sales literature used by the health insurance industry. 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-lntervention by the SEC

In this instance, the issue was variable annuities: Are the insurance products to be regulated by the states or securities to 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.

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. Fraternals first began offering insurance to meet the needs of their poorer members, funding the benefits on a pure assessment basis. Today, few fraternals rely on an assessment system, most having 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. Fraternals must be formed for reasons other than obtaining insurance. Most fraternals today issue group and annuities with many of the same provisions found in policies issued by commercial insurers.

Industrial Insurer

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

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

The decision of Paul v. Virginia 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 business of insurance is subject to a series of federal laws, many of which were in conflict with existing state laws, and that insurance is a form of interstate commerce to be regulated by the federal government. This decision did not affect the power of states to regulate insurance, but it did nullify state laws that were in conflict with federal legislation. The result of the SEUA case was to shift the balance of regulatory control to the federal government.

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 public welfare by maintaining the solvency of insurance companies. Other purposes are to provide consumer protection and ensure fair trade practices as well as fair contracts at fair prices. It is very important insurance agents understand and obey the insurance laws and regulations.

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.

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 continued regulation of insurance by the states 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 The McCarran-Ferguson Act made it clear that continued regulation of insurance by the states was in the public's best interest.