Chapter 1

A broker represents the

applicant or insured's interests, not the insurer, and does not have legal authority to bind the insurer. Broker licenses are not applicable in all states

The Act made it a felony for a person to engage in the business of insurance after

being convicted of a state or federal felony crime involving dishonesty or breach of trust

When claims are paid by the insurer to the consumer, the actual source of the funds may come from

both the insurer and their reinsurer but the consumer will not know how much came from each.

Directors and officers, which are elected by stockholders, put in place a management team to

carry out the company's mission

Insurable Events

Any event, past or present, which may cause loss or damage, or create legal liability on the part of an insured

Actuarial Department

Gather and interpret statistical information used in rate making. An actuary determines the probability of loss and sets premium rates

Application information remains

confidential

Managing Risk

Analyzing exposures that create risk and designing programs to minimize the possibility of a loss

Loss Exposure

The condition of being at risk of loss

Penalties

fines and possible prison time

A Joint Underwriting Association or Joint Reinsurance Pool - Requires insurers writing specific coverage lines in a given state to assume their share of

profits/losses of the total voluntary market premiums written in that state.

The Fair Credit Reporting Act

protects consumer privacy and protects the public from overly intrusive information collection practices

Surplus Lines Insurance finds coverage when insurance cannot be obtained from admitted insurers. However, it cannot be utilized solely to

receive lower cost coverage than would be available from an admitted carrier.

Dishonesty

refers to misrepresentation, untruthfulness, falsification

All contractual obligations are on the original (primary) company and consumers have no direct contact with

reinsurance companies

Residual markets are a last resort private coverage source for businesses and individuals who have been

rejected by the voluntary insurance market

Agents/brokers are required to

report any activity they believe or even have reason to suspect is an effort to launder money

An applicant has the right to

review the report

The USA Patriot Act

specified which financial institutions would be required to institute AML training programs including insurance companies. The act specified which insurance products require anti-money laundering training and how to respond to suspected laundering activity. It also helped expand the definition of money laundering to include the money's ultimate purpose as well as its origin. The insurance products being used are mostly single premium permanent life insurance and annuity products, as they generate cash value

Types of Risk

speculative and pure

The insurance industry is regulated primarily at the

state level

A stock company is owned by

stockholders or shareholders

Each time the privacy notice is re-established

the consumer has the right to opt out again.

Reinsurance companies are insurance companies that operate to accept all or a portion of

the financial risk of loss from the primary (or "ceding") insurance company

Avoidance

1. Elimination of the risk 2. Avoid the activity that gives rise to the chance of loss 3. After potential areas of hazards have been identified, it may be found that some exposure to risk can be eliminated, but it is impossible to avoid all risk 4. A risk may be avoided by not accepting or entering into the event which has hazards. This method has severe limitations because such a choice is not always possible, or if possible, it may require giving up some important advantages

If a person engaged in the business of insurance whose activities affect interstate commerce willfully embezzles, misappropriates funds/property, knowingly and with the intent to deceive makes a false material statement or purposely overstates the security of an insurer, the following penalties apply:

1. A fine of no more than $50,000, imprisonment for up to 10 years, or both 2. If the violation jeopardized the safety and soundness of an insurer and was a significant cause of the insurer being placed in conservation, rehabilitation, or liquidation by an appropriate court, imprisonment can be for up to 15 years 3. If the amount embezzled or misappropriated does not exceed $5,000, violators will be fined up to $50,000 or imprisoned for up to 1 year, or both

The Insurance Contract

1. A legal contract purchased to indemnify the insured against a loss, damage, or liability arising from an unexpected event. 2. The exchange of a relatively small and definite expense for the risk of loss that, if it occurs, may be large or small. 3. A contract designed to transfer risk from the insured to the insurer.

Independent Agency

1. An agent or agency that enters into selling agreements with more than one insurer. It may represent an unlimited number of insurers 2. Agency retains ownership of the business written 3. An independent contractor that is paid a commission and covers the cost of agency operations

As it pertains to insurance license applicants and producers

1. Applicants who have been convicted of a felony must apply for Consent to Work (1033 Waiver) in the business of insurance - prior to applying for an insurance license. 2. Producers must apply for consent in their resident state. 3. Officers and employees must apply for consent in the state where their home office is located. 4. Prohibited persons (convicted felons) must apply for consent in order to discover if they are permitted or prohibited from the insurance business. 5. Reciprocity - If consent is granted by any state, other states must allow the applicant to work in their states as well. 6. Consent Withdrawal - If conditions of consent are not continually met, the consent may be withdrawn.

Retention

1. Assume the responsibility for loss. 2. Self-insure the entire loss or a portion of the loss. Choosing deductibles is a method of risk retention. 3. It may be economically practical for an insured to not insure each exposure to loss and, instead insure only those risks that threaten financial stability or security.

Examples of pure risk include the possibility of

1. Damage to property caused by a fire or other natural disaster 2. Financial loss as a result of injury, illness, or death

Exclusive or Captive Agency System

1. Deals with the insured through an exclusive or captive agent. 2. Agent represents solely one company or group of companies having common ownership 3. Insurer retains ownership rights to the business written by the agent 4. The agent is an employee or a commissioned independent contractor 5. Insurer may or may not provide office and agency support services

Personal Producing General Agent

1. Does not recruit career agents. 2. Sells insurance for carriers it is contracted with and maintains its own office and staff.

A producer acts with one or more of the following three types of authority:

1. Express - Authority that is written into the producer's contract. An example would be the producer's binding authority if written in the contract. A producer's contract may also express what the producer may not do, such as creating his/her own advertisements. 2. Implied - Authority the public assumes the producer has. An example would be the business activities of providing quotes, completing applications and accepting premiums on behalf of the insurer. 3. Apparent - Authority created when the producer exceeds the authority expressed in the agency contract. This occurs when the insurer takes no action to counter the public impression that such authority exists. An example would be the producer's issuance of a binder when, in fact, the producer has not been granted such authority.

Producer's Responsibilities to the Insurer:

1. Fiduciary duty to the insurer in all respects. A fiduciary is a legal or ethical relationship of trust between two or more parties. Typically, a fiduciary prudently takes care of money for another person especially when handling premiums for insurance policies or applications 2. Must keep premiums in a trust account separate from other funds and forward to insurer promptly (no commingling) 3. Must report any material facts that may affect underwriting 4. Responsible for soliciting, negotiating, selling, and cancelling the insurance policies with the insurer 5. Duty to only recommend the purchase of suitable policies

Producer's Responsibilities to Insurance Applicant or Insured:

1. Forward premiums to insurer on a timely basis 2. Seek and gain knowledge of the applicant's insurance needs 3. Review and evaluate the applicant's current insurance coverage, limits, and risks 4. Serve the best interests of the applicant or insured, although producers represent the insurer 5. Recommend coverage that best protects the insured from possible loss and NOT the most profitable coverage from the perspective of the producer 6. Life and health producers do not issue contracts or binders for life or disability insurance, and should not imply that coverage is in effect simply because a person submits an application and payment for the first premium

Insurable interest - life and health policies

1. Insurable interest must exist at the time of application, but not at time of loss. 2. Coverage is determined based on the possibility of an economic or financial loss due to an accident, sickness, or death of the insured. 3. The amount of insurance that may be purchased varies based on the type of coverage. Each person has an unlimited insurable interest in his/her own life, but this does not prevent an insurance company from limiting the amount of life insurance it makes available to any person. The insurer does not want to over insure as this may increase the likelihood of a claim.

Insurable interest - casualty

1. Insurable interest must exist at the time of the loss. 2. Insurable interest usually results from property or contract rights and potential legal liability.

Insurable interest - All Policies

1. Insurable interest must exist in every enforceable insurance contract. 2. Requires the potential for an insured to suffer financial or economic hardship in the event of a loss, as well as a valid legal purpose for the contract.

Principle of Indemnity

1. Insured is intended to be restored to the same financial or economic condition that existed prior to the loss, depending on the amount and type of insurance purchased. 2. Insured should not profit from an insurance transaction, but be made "whole again"

Direct Mail or Direct Response Company

1. Insurers who sell insurance policies directly to the public with licensed employees or contractors 2. A marketing system utilizing mass media, such as direct mail, newspapers, magazines, radio, television, internet, web sites, call centers and vending machines

Sharing

1. Investments by a large number of people may be pooled by use of a corporation or partnership. 2. Pooling or spreading the risk among a large number of persons or entities

Insurable risks must include

1. Large number of homogeneous units or groups with the same perils. - Law of Large Numbers - As the number of units in a group increases, the more likely it is to predict a particular outcome. - Auto insurance losses are the easiest type of insurance loss to predict precisely because the number of units insured is so great. 2. The chance of loss must be calculable. A statistical expectation of loss is used by insurers to calculate premiums. 3. The loss must be measurable (definite and verifiable in terms of amount, cause, place and time). 4. The premiums must be affordable. 5. From the perspective of the insured, the loss must be accidental in nature. 6. Catastrophic perils are not covered; examples include war, nuclear hazard and illegal operations.

Reduction

1. Minimizing the chance of loss, but not preventing the risk. For example, sprinkler systems, burglar alarms, pollution controls and safety guards on machinery, taking medications, having preventive medical care.

There are several "red flags" agents are trained to recognize, one in particular is a client buying a policy simply to hide or move illegal money. Practices that are outside the norm for life insurance transactions include

1. Paying for an entire policy up front with cash 2. Early cancellation of the policy, regardless of cancellation fees (surrender charges) 3. The heavy use of third parties for policy transactions 4. Strong reliance on wire or electronic fund transfers to foreign accounts

Direct Writing System

1. Producer or Agent is an employee of the insurer 2. Insurer owns the accounts 3. The agent may be paid a salary, salary+bonus, or commission

Ways of managing risk:

1. Sharing 2. Transfer 3. Avoidance 4. Reduction 5. Retention

Management

1. The determination of what types of protection are required to meet an insured's needs. Risk may be manageable, but it cannot be eliminated 2. A survey of the insured's operations, health, and risk exposures that could give rise to losses, including the identification of hazardous conditions or situations that could be reduced or eliminated to prevent losses 3. Assessment of potential loss frequency and severity 4. Physical inspections, applications or medical exams used in underwriting may help to manage or raise awareness of a risk 5. Health insurance providers may offer insureds "wellness" programs at low or no cost for weight loss, smoking reduction, stress, or medical conditions such as diabetes as a means of reducing the company's future claims exposure

Foreign Insurer

An insurer incorporated in New York is considered foreign to Kansas.

The privacy notice must explain:

1. The information collected about the consumer 2. Where that information is shared 3. How that information is used 4. How that information is protected

Transfer

1. Transferring the risk from one party to another, such as from a consumer to an insurance company 2. Transfer the uncertainty of loss via a contract

Mass Marketing

1. Used to target a specific type of insurance to a large group of individuals, such as the American Association of Retired People (AARP) 2. Insurer may benefit by reductions in marketing costs and underwriting expenses may be lower when offering coverage to a limited population. Mass marketing uses the direct response or direct mail method to reach its targeted audience. 3. Associations may receive some financial benefit from allowing an insurer to market directly to its membership

Insurable interest - property

1. While it is unlikely an insurer will issue a policy if there is no insurable interest at the time of application, insurable interest must specifically exist at the time of the loss. 2. Property ownership (or mortgage or lien) is evidence of insurable interest.

No single insurance company is exposed to

100% of the losses it insures

Risk

A condition where the chance, likelihood, probability or potential for a loss exists.

Limited access to information

A consumer reporting agency may not provide a credit report to any party that lacks a permissible purpose, such as the evaluation of an application for a loan, credit, service, or employment. Permissible purposes also include several business and legal uses.

Correct or delete inaccurate information

A consumer reporting agency must correct or, if necessary, delete from a credit file the information that is found to be inaccurate or can no longer be verified. The consumer reporting agency is not required to remove accurate data from a file unless it is outdated. Adverse information that is more than 7 years old (10 years for bankruptcies) must be removed from the file.

Hold Harmless Agreement

A contractual agreement that transfers the liability of one party to another party; it is used by landlords, contractors, and others as a way to avoid or reduce risk

Broker

A licensed individual who negotiates insurance contracts with insurers on behalf of the applicant

Producer (agent)

A person or agency appointed by an insurance company to represent it and to sell policies on its behalf.

Physical Hazard

A physical condition that increases the likelihood or probability of loss. Physical hazards may be seen, heard, felt, tasted, or smelled. Example: Flammable material stored near a furnace.

Hazard

A specific condition that increases the probability, likelihood, or severity of a loss from a peril

As of May 2006, insurance companies have been required to provide

AML training to their producers

Inaccuracies

Agency must forward to applicant inaccurate information given out within previous 2 years.

Career Agency System

Agents are recruited, trained and supervised by either a managing employee or General Agent who is contracted with the insurance company.

Morale Hazard

An attitude of indifference toward the risk of loss that increases the probability of a loss occurring. Example: Driving too fast for conditions, not wearing a seat belt, ignoring stop signs at familiar intersections, smoking, failure to take medications that could control a medical condition are all morale hazards.

Adverse Selection

An imbalance created when risks that are more prone to losses than the average (standard) risk are the only risks seeking insurance within a specific marketplace

Alien Insurer

An insurer incorporated in (OUTSIDE OF US) Ontario, Canada, is considered alien to New York.

Domestic Insurer

An insurer incorporated in New York is considered domestic to New York

Claims Department

Assists the policyholder, insured, or beneficiary in the event of a loss and processes, and pays the amount of the claim in a timely manner based upon the contractual provisions and the amount insured

An Admitted (Authorized) insurer is authorized by this State's Commissioner of Insurance to do business in this State and has received a

Certificate of Authority to do business in this State.

Disclosure upon request

Consumer reporting agencies must provide the information on file if requested.

Applicant challenge

Credit reporting agency must reinvestigate within 6 months, if applicant challenges accuracy.

Moral Hazard

Dishonest tendencies that increase the probability of a loss; certain characteristics and behaviors of people. Moral hazards most closely related to some form of lying, cheating, or stealing. Example: An insured burns down his/her own house to collect the insurance payout.

Subsequently, each of the states enacted its own

Fraudulent Insurance Act

Risk Retention Groups are group-owned insurers that primarily assume and spread the liability-related risks of its members. They are owned by their policyholders, and are licensed in at least one state. However, they may insure members of the group in other states.

Groups must be made up of a large number of homogeneous or similar units. Membership is limited to risks with similar liability exposures such as theme parks, go-cart tracks, or water slides. They must have sufficient liquid assets to meet loss obligations. Each member assumes a portion of the risks insured.

Investigation of disputed information

If a consumer's file contains inaccurate information, the agency must promptly investigate the matter with the source that provided the information. If the investigation fails to resolve the dispute, a statement may be added to the credit file explaining the matter.

A reciprocal insurance company is a group-owned insurer whose main activity is risk sharing. A reciprocal insurer is unincorporated, and is formed by individuals, firms, and business corporations that exchange insurance on one another. Each member is known as a subscriber, and each subscriber assumes a part of the risk of all other subscribers.

If premiums collected are insufficient to pay losses, an assessment of additional premium can be made. The exchange of insurance is affected through an Attorney-In-Fact, who is not required to be insurance licensed.

Rather than paying premiums to a third party the self-insurer sets aside funds in an amount equal to or greater than the expected losses.

If the losses are less than what is reserved to pay claims, it is a gain, otherwise, losses in excess of the reserve will require additional funding perhaps from on-going operation revenues.

Risk Sharing Plan

Insurers agree to apportion among themselves those risks that are unable to obtain insurance through normal channels.

In the aftermath of the Supreme Court decision in U.S. v. South-Eastern Underwriters (1944)

McCarran-Ferguson Act of 1945 established that the federal government will not regulate the business of insurance in areas which the states have historically had the authority to do so

Lloyd's of London is not an insurance company, but consists of groups of underwriters called Syndicates, each of which specializes in insuring a particular type of risk. Lloyd's provides a meeting place and clerical services for syndicate members who actually transact the business of insurance.

Members are individually liable for each risk they assume, and coverage provided is underwritten by a syndicate manager such as an attorney-in-fact or individual proprietor.

Executives

Oversee the operation of the business

Contract Law

Pertains to the formation and enforcement of contracts.

Loss

Reduction, decrease, or disappearance of value. A loss is the basis of a claim under the terms of an insurance policy

Domicile

Refers to the jurisdiction (i.e., state or country) where an insurer is formed or incorporated

Facultative

Reinsurance agreement that allows the reinsurance company an opportunity to reject coverage for individual risks, or price them higher due to their substandard (higher risk) nature

Treaty

Reinsurance agreement that automatically accepts all new risks presented by the ceding insurer

Disallowed information

Report must not include lawsuits over 7 years old or bankruptcies more than 10 years old.

Marketing/Sales Department

Responsible for advertising and selling.

Underwriting Department

Responsible for the selection of risks (persons or property) to insure and rating that determines policy premiums.

Speculative Risk

Situations where there is a chance for loss, gain, or neither loss nor gain to occur. Examples of speculative risk include gambling, investing, starting a new business

Pure Risk

Situations where there is no chance for gain; the only outcome is for nothing to occur or for a loss to occur

Can be placed through non-admitted carriers. Non-admitted business must be transacted through a

Surplus Lines Broker or Producer

Each State regulates the procurement of

Surplus Lines insurance in its State

Insurer (principal)

The Insurer is the source of authority from which the producer must abide. Insurer appoints the producer to act on its behalf in transacting the business of insurance. It is responsible for all acts of its producers when a producer is acting within the scope of his/her authority. A producer may be personally liable when his/her actions exceed the authority of his/her contract

Reasonable Expectations Doctrine

What a reasonable and prudent policy owner would expect; the reasonable expectations of policyowners are honored by the Courts although the strict terms of the policy may not support these expectations.

When an application is taken, it must inform the applicant

a credit report can be obtained

A fraudulent act involves

a misstatement of material fact by a person who knows or believes that statement to be false. The statement is made to another person who relies on its accuracy to make a decision or to act and is subsequently harmed by relying on the deliberately false statement. State fraudulent insurance acts do not modify the privacy of any individual; they protect producers, brokers, and insurers in the event fraudulent information is provided by consumers.

The principal is responsible for the

acts of the agent, and the agent's acts bind the principal. An act of an agent is the act of the principal.

The domicile does not impact whether an insurer may be

admitted to do business in this State

Insurability

The ability of an applicant to meet an insurer's underwriting requirements.

Peril

The cause or source of a loss (fire, windstorm, embezzlement, disease, death)

Violent Crime Control and Law Enforcement Act of 1994 (18 USC 1033, 1034)

The largest crime bill in U.S. history expands funding to federal agencies such as the FBI, DEA, and INS and includes provisions that address (among other topics) domestic abuse and firearms, gang crimes, immigration, registration of sexually violent offenders, victims of crime, and fraud.

Underwriting

The process of selecting, classifying, and rating a risk for the purpose of issuing or not issuing insurance coverage.

Law of Agency

The relationship of a person (called the agent or producer) who acts on behalf of another person, company, or government, known as the principal

Fraternal benefit societies are primarily social organizations that engage in charitable and benevolent activities that can provide life and health insurance to their members. Membership typically consists of members of a given faith, lodge, order, or society

They are usually organized on a non-profit basis, and fraternal insurance producers represent the fraternal insurer and sell insurance to fraternal members.

A Non-admitted (Unauthorized) insurer has either applied for authorization to do business in this State and was declined or they have not applied

They do not have a Certificate of Authority to do business in the State

Gramm-Leach-Bliley Act (the Financial Services Modernization Act of 1999)

This repealed parts of the Glass-Steagall Act of 1933 to allow the merger of banks, securities companies, and insurance companies. It also established the Financial Privacy Rule and Safeguards Rule for the protection of consumers' privacy.

Tort Law

Torts are civil wrongs; they're not crimes or breaches of contract. They result in injuries or harm that constitute the basis of a claim by a third party.

These new requirements and standards were necessitated by the

USA Patriot Act

Self-insurers assume

all of the financial risk faced without transferring that risk to an insurer

Insurance applications and claim forms must contain a

disclosure about how false statements and fraud will be treated by the insurer

Stockholders may receive taxable corporate dividends as a share of the company's profit when and if declared by the Directors. However,

dividends are NOT guaranteed

Fraud always involves a false statement and deceit; it can be

either a criminal or civil crime

It also

ensures data collected is confidential, accurate, relevant and used for a proper and specific purpose

The purpose of this is to determine the

financial and moral status of the applicant

If a person uses threats, force or attempts to impede/obstruct the administration of the law during any proceeding involving the business of insurance before any insurance regulatory official, he/she will be

fined up to $50,000 or imprisoned up to 10 years, or both

Any individual who has been convicted of a felony involving dishonesty or a breach of trust, who then willfully engages or permits an individual to engage in the business of insurance, and whose activities affect interstate commerce, will be

fined up to $50,000 or imprisoned up to 5 years, or both

Reinsurance is what makes

insurance affordable

In 2001, the NAIC adopted model legislation for the prevention and enforcement of

insurance fraud

Pure risk can be

insured

Speculative risk cannot be

insured

Breach of Trust

is based on fiduciary relationship of parties and the wrongful acts violating the relationship

In insurance, the consumer relationship is created when the policy is

issued to the client

This is generally an option only for

large companies

With the increase of drug trafficking and acts of terrorism, the desire and demand for

laundered money has also increased

Traditionally, stock insurers issue

non-participating policies (POLICY HOLDER NOT ENTITLED TO RECEIVE DIVIDENDS)

Should the financial institutions privacy policy change at any point in time, the consumer must be

notified again for acceptance

The risk of loss is shared with

one or more insurance companies

Ex. of adverse selection

only those living in earthquake-prone areas seek to buy earthquake insurance or those in the poorest of health seeking to acquire life or health insurance. High risks exposures tend to seek or continue insurance at a higher participation rate than the average risk exposures do

The notice must also identify the consumer's right to

opt out of the information being shared with unaffiliated parties pursuant to the provisions of the Fair Credit Reporting Act.

Traditionally, mutual insurers issue

participating policies (POLICY HOLDER IS ENTITLED TO RECEIVE DIVIDENDS)

A mutual company is owned by

policyholders

Most insurance is written through

private insurers

There are instances where governmental-based insurers step in to offer an insurance alternative when

private insurers are unable to provide protection

To an insurance company, each insured person or their covered property represents

the risk of loss and the value of each potential claim is a known loss exposure

The Financial Privacy rule requires "financial institutions," which include insurers

to provide each consumer with a privacy notice at the time the consumer relationship is established and annually thereafter

Brokers as well as agents are required to

undergo training

Violations include

willfully embezzling money, knowingly making false entries in any book, report or statement of the business, threatening or impeding proper administration of the law in any proceeding involving the business of insurance.