Insurance licensing exam- Chapter 1

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:

-A fine of no more than $50,000, imprisonment for up to 10 years, or both -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 -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

There are three types of Insurer domiciles:

-Domestic Insurer -Foreign Insurer -Alien Insurer

Producer's responsibilities to the Insurer:

-Fiduciary duty to the insurer in all respects, especially when handling premium funds. -Must keep premium funds in a trust account separate from other funds and forward to insurer promptly. -Must report any material facts that may affect underwriting. -Responsible for soliciting, negotiating, selling, and cancelling the insurance policies with the insurer. -Duty to only recommend the purchase of suitable policies.

Types of Reinsurance

-Treaty Agreements - Reinsurance agreement that covers all risks contained in the subject line(s) of business automatically. -Facultative Agreements - Reinsurance agreement that allows ceding and reinsurance companies the opportunity to negotiate coverage for individual risks.

Broker

A licensed individual who negotiates insurance contracts with insurers, on behalf of the applicant. A Broker represents the applicant or insured's interests, not the insurer, and thus does not have legal authority to bind the insurer. A broker's license is not applicable in all states.

Mutual Insurance Company

A mutual company is owned by policyholders (who may be referred to as members). A Board of Trustees or Directors directs the company operations and is elected by policyholders. Policyholders receive non-taxable dividends as a return of unused premium when declared by the directors. Dividends are not guaranteed. Mutual insurers typically issue Participating policies.

Residual Markets

A private coverage source of last resort for businesses and individuals who have been rejected by voluntary market insurers. -A Joint Underwriting Association or Joint Reinsurance Pool requires insurers writing specific coverage lines in a given state to assume the profits/losses accruing their share of the total voluntary market premiums written in that state

Reciprocal Insurance Company

A reciprocal insurance company is a group-owned insurer whose main activity is risk sharing. They are unincorporated, and formed by individuals, firms, and business corporations that exchange insurance on one another. Each member is known as a subscriber. 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.

Law of Agency

A relationship between two or more parties where one party (the agent or producer) acts on behalf of the other party, known as the principal or insurer. The agent or producer binds the actions and words of the principal.

Stock Insurance Company

A stock company is owned by stockholders or shareholders. Directors and officers direct the company operations and are elected by stockholders. Stockholders receive taxable corporate dividends as a return of profit when declared by the Directors. Dividends are not guaranteed. Traditionally, stock insurers issue Non-Participating policies.

4. Career Agency System

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

3. Independent Agency

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

Admitted vs. Nonadmitted

Refers to whether or not an insurer is approved or authorized to write business in this State. The domicile does not impact whether an insurer may be admitted to do business in this State.

Reinsurance Company

An insurance company that assumes all or a portion of a risk for a primary or ceding insurance company; reinsurance transfers risk among insurance companies. The insurer originating the application is the primary or ceding company. The insurer sharing in the risk is the reinsurance company. Consumer inquiries must originate with the ceding company, which then obtains reinsurance.

Foreign Insurer

An insurer not organized under the laws of this state, but in one of the other states or jurisdictions within the United States, whether or not it is admitted to do business in the state or jurisdiction.

Alien Insurer

An insurer organized under the laws of any jurisdiction outside of the United States, whether or not it is admitted to do business in this state.

Domestic Insurer

An insurer organized under the laws of this state, whether or not it is admitted to do business in this state.

Apparent Authority

Apparent - Authority created when the producer exceeds the authority expressed in the agency contract. This occurs when the insurer does nothing to counter the public impression that such authority exists. An example would be the producer's acceptance of premiums on a lapsed policy.

The applicant has the right to review the report.

Applicant challenge - Credit reporting agency must reinvestigate within 6 months, if applicant challenges accuracy. Inaccuracies - Agency must forward to applicant inaccurate information given out within previous 2 years. Disallowed information - Report must not include lawsuits over 7 years old or bankruptcies over 10 years old. The Insurer is not responsible for correcting inaccuracies on any reports. However, if an applicant is denied coverage because of inaccurate information, they are entitled to certain rights.

Claims Department

Assists the policyholder in the event of a loss.

Merchant Marine Act of 1920 (the Jones Act)

Because workers' compensation laws do not apply to seamen, the Jones Act allows insured seamen to make claims for injuries suffered during the course of employment. It also regulates maritime commerce in U.S. waters, transportation of cargo, and the rights of seamen.

5. Personal Producing General Agent

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

Distribution Models 1. Exclusive or Captive Agency System

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

Motor Carrier Regulatory and Modernization Act (the Motor Carrier Act of 1980)

Deregulated the trucking industry by prohibiting any entity from interfering with a motor carrier's right to set its own rates. Motor carriers and private motor carriers that transport property are required to establish evidence of financial responsibility in the form of insurance, a bond, a guarantee, or qualification as a self-insurer.

Insurer Domicile and Admittance

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

Risk Sharing Plan

Insurers agree to apportion among themselves those risks that are unable to obtain insurance through normal channels. Coverage is typically written as workers' compensation, personal auto liability or property insurance on real property.

Express Authority

Express - Authority that is written into the producer's agency contract. An example would be the producers binding authority if written in the contract.

Producer's responsibilities to insurance Applicant or Insured:

Forward premiums to insurer on a timely basis. Seek and gain knowledge of the applicant's insurance needs. Review and evaluate the applicant's current insurance coverage, limits and risks. Serve the best interests of the applicant or insured, although producers represent the insurer. Recommend coverage that best protects the insured from possible loss and NOT the most profitable coverage from the perspective of the producer.

Fraud and False Statements (Fraudulent Insurance Act)

Fraud always involves a false statement and deceit; it can be either a criminal or civil crime. Federal laws prohibit the commission of fraud. In 2001, the NAIC adopted model legislation for the prevention and enforcement of insurance fraud. Subsequently, each of the states enacted its own Fraudulent Insurance Act.

Actuarial Department

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

Implied Authority

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.

Financial Anti-Terorrism Act (The USA Patriot Act)

Imposes record keeping and government reporting requirements on banks, financial institutions and non-financial businesses for specific financial transactions and customer financial records (a part of the Bank Secrecy Act).

Financial Rating Services

Independent financial rating services evaluate and rate the financial stability of insurance companies. These companies assign rating codes to show financial strength or weakness of each company rated. The ratings are available to the public and producers are responsible for placing business with insurers that are financially sound. Examples of rating services include: A.M. Best Company, Standard &Poor's, Moody's Investment Services, Weiss Insurance Rating, and Fitch Ratings.

Lloyds of London

Lloyds 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. Lloyds 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. Coverage provided is underwritten by a syndicate manager, such as an attorney-in-fact or individual proprietor.

7. Mass Marketing

Mass marketing is used to target a specific type of insurance to a large group of individuals, such as the American Association of Retired People (AARP). Insurer reduces marketing and underwriting expenses.

Private vs. Government Insurers

Most insurance is written through private insurers. However, there are instances where governmental-based insurers step in to offer an insurance alternative when private insurers are unable to provide protection. This usually relates to the catastrophic nature of the risk, capacity to handle the risk, and lack of desire to engage in a line of insurance where experience to evaluate necessary premium intake to offset potential loss is lacking.

Executives

Oversee the operation of the business.

Producer

Producer - A person or agency appointed by an insurance company to represent it and to present policies on its behalf. A producer possesses three types of authority: 1. Express 2. Implied 3. Apparent

2. Direct Writing System

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

Marketing/Sales Department

Responsible for advertising and selling.

Underwriting Department

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

Risk Retention Groups (RRGs)

Risk Retention Groups are group-owned insurers that primarily assume and spread the liability related risks of their members. RRGs are owned by their policyholders and licensed in at least one state. However, they may insure members of the group in other states. The Group must be made up of a large number of homogeneous or similar units and membership is limited to risks with exposure to similar liability needs, such as theme parks, go cart tracks, or waterslides. The Group also must have sufficient liquid assets to meet loss obligations and each member assumes a portion of the risks insured.

6. Direct Mail or Direct Response Company

Sells insurance policies directly to the public with licensed employees or contractors. A marketing system utilizing direct mail, newspapers, magazines, radio, television, internet, web sites, call centers and vending machines.

Fair Credit Reporting Act (15 USC 1681-1681d)

The Fair Credit Reporting Act protects consumer privacy, while ensuring data collected is confidential, accurate, relevant and used for a proper and specific purpose. It also protects the public from overly intrusive information collection practices. When an application is taken, it must inform the applicant a credit report (from consumer reporting agency) will be obtained. The purpose of this is to determine the financial and moral status of an applicant (for variety of purposes such as employment screening, insurance underwriting or loan approvals).

Fraternal Benefits Society

Usually organized on a non-profit basis, fraternal benefit societies are primarily social organizations that engage in charitable and benevolent activities that provide life and health insurance to their members. Membership typically consists of members of a given faith, lodge, order, or society.

Insurer (principal)

The Insurer is the source of authority from which the producer must abide; and it is responsible for all acts of a producer, but only when the producer is acting within the scope of his/her authority. However, a producer may be personally liable when his/her actions exceed the authority of the agency's contract.

Insurance Regulation at the Federal Level

The McCarran-Ferguson Act of 1945 determined that the federal government can not regulate insurance in areas over which states have the authority to do so. Congress created federal agencies to provide regulatory oversight impacting insurance practices. Government insurers step in (as a last resort) when private insurers are unable to provide protection relative to the catastrophic nature or unpredictability of a risk.

Terrorism Risk Insurance Act and its Extensions of 2005 and 2007

The Terrorism Risk Insurance Act of 2002 (TRIA) was enacted in direct response to the terrorist attacks New York City and Washington, D.C. on September 11, 2001. Congress provided temporary financial compensation to insured parties during its crisis of recovery from the terrorist attacks. TRIA was intended to respond to the chaos the 9/11 terrorist attacks caused in the insurance industry as well as to assure that commercial property and liability insurance would continue to be able to provide coverage for the peril of terrorism. It also was a temporary program that allowed the federal government to share in terrorism losses with private insurers in the event a certified act of terrorism took place.

Insurance Regulation at the State Level

The insurance industry is regulated primarily at the state level. The legislative branch writes and passes state insurance laws, or statutes, to protect the insuring public. The judicial branch is responsible for interpreting and determining the constitutionality of the statutes. The role of a state's executive branch is to enforce the existing statutes that have been put in place. The Commissioner, Director, or Superintendent of Insurance is typically appointed by the Governor, and the Commissioner has the power to issue rules and regulations to help enforce these statutes.

Gramm-Leach-Bliley Act (GLBA, a.k.a. the Financial Services Modernization Act of 1999

This act 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. 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. The privacy notice must explain: The information collected about the consumer. Where that information is shared. How that information is used. How that information is protected. 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. Should the financial institutions privacy policy change at any point in time, the consumer must be notified again for acceptance. Each time the privacy notice is re-established, the consumer has the right to opt out again.

Self-Insurer

To self-insure means to assume the financial risk one's self. This is generally an option only for large companies who may even reinsure for risks above certain maximum limits.

Insurance applications and claim forms must contain

a disclosure about how false statements and fraud will be treated by the insurer. A sample warning is, "Any person who knowingly presents false or fraudulent information on an insurance application or claim for the payment of a loss is guilty of a crime and may be subject to fines and confinement in state prison."

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.

Surplus and Excess lines insurance

can be placed through non-admitted carriers.

The National Association of Insurance Commissioners (NAIC)

consists of all State and territorial insurance commissioners or regulators. The NAIC provides resources, research, legislative and regulatory recommendations and interpretations for state insurance regulators. The association promotes uniformity among states and members may accept or reject recommendations. The NAIC has no legal authority to enact or enforce insurance laws.

Surplus (excess) Lines Insurance

finds coverage when the kind or amount of insurance cannot be obtained from admitted insurers. -It may not be utilized solely to receive lower cost coverage than would be available from an admitted carrier. -Each State regulates the procurement on Surplus Lines insurance in their State. -Non-admitted business must be transacted through a Surplus Lines Broker.

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.

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 are not authorized to transact insurance in this state.

An Admitted (Authorized) insurer

is authorized by this State's Commissioner of Insurance to do business in this State. It has received a Certificate of Authority to do business in this State.

The Federal Insurance Office (FIO)

was established by the Dodd-Frank Wall Street Reform and Consumer Protection Act. This office monitors the insurance industry and identifies issues and gaps in the state regulation of insurers. It also monitors access to affordable insurance by traditionally underserved communities and consumers, minorities, and low- and moderate-income persons. The FIO is not a regulator or supervisor. Insurance is primarily regulated by the individual States.

Insurance producer and company trade associations also exist to

provide education, support, networking and lobbying for insurance companies and producers.