Michigan- General Insurance

Type of Marketing Arrangements- General Agency System

-General agent-entrepreneur represents 1 company -Exclusive -Compensation and commissions -Appoints subagents

Type of Marketing Arrangements- Direct Response Marketing System

-No agents -Company advertises directly to consumers (through mail, Internet, television, other mass marketing) -Consumers apply directly to the company

Insurance Defined

A contract whereby one party (insurer) agrees to indemnify or guarantee another party (insured) against a loss by a specified future contingency or peril in return for payment of a premium.

The Law of Large Numbers

A principle stating that the larger the number of similar exposure units considered, the more closely the losses reported will equal the underlying probability of loss.

Responsibilities to the Applicant/Insured

Although the agents act for the insurer, they are legally obligated to treat applicants and insureds in an ethical manner. Because an agent handles the funds of the insured and the insurer, he/she has fiduciary responsibility.

Fiduciary Responsibility

An agent/broker who handles insurer's funds and someone in a position of trust. More specifically, it is illegal for insurance producers to commingle premiums collected from the applicants with their own personal funds.

Agency

An agent/producer is an individual licensed to sell, solicit or negotiate insurance contracts on behalf of the principal (insurer).

Authorized vs. Nonauthorized Insurers

Before insurers may transact business in a specific state, they must apply for and be granted a license or Certificate of Authority from the state department of insurance and meet any financial (capital and surplus) requirements set by the state. Insurers who meet the state's financial requirements and are approved to transact business in the state are considered authorized or admitted into the state as a legal insurer. Those insurers who have not been approved to do business in the state are considered unauthorized or nonadmitted. Most states have laws that prohibit unauthorized insurers to conduct business in the state, except through licensed excess and surplus lines brokers.

Consideration

Binding force in any contract. is something of value that each party gives to the other. The consideration on the part of the insured is the payment of premium and the representations made in the application. The consideration on the part of the insurer is the promise to pay in the event of loss.

Life and Health Example: Indemnity

Brenda has a health insurance policy for $20,000. After she was hospitalized, her medical expenses added up to $15,000. The insurance policy will reimburse Brenda only for $15,000 (the amount of the loss), and not for $20,000 (the total amount of insurance).

Property and Casualty Example: Indemnity

Brenda has a homeowners insurance policy for $200,000. After her home was destroyed, her expense to rebuild the home added up to $150,000. The insurance policy will reimburse Brenda only for $150,000 (the amount of the loss), and not for $200,000 (the total amount of insurance).

Private vs. Government Insurers

Federal and state governments provide insurance in the areas where private insurance is not available, called social insurance programs. Government insurance programs include Social Security, Medicare, Medicaid, Federal Crop insurance and National Flood insurance. The major difference between government programs and private insurance programs is that the government programs are funded with taxes and serve national and state social purposes, while private policies are funded by premiums.

3 Types of Agent Authority- Implied

Implied authority is authority that is not expressed or written into the contract, but which the agent is assumed to have in order to transact the business of insurance for the principal. Implied authority is incidental to and derives from express authority since not every single detail of an agent's authority can be spelled out in the written contract. Example: If the agency contract does not specifically authorize the agent to collect premiums and remit them to the insurer, but the agent routinely does so in the process of solicitation and delivery of policies, the agent has the implied authority to collect and remit premiums.

Distinct Characteristics of an Insurance Contract

In addition to required elements, insurance contracts have unique characteristics that distinguish them from other types of legal contracts. It is important to understand these features and how they affect parties to an insurance contract.

Elements of a Legal Contract

In order for insurance contracts to be legally binding, they must have 4 essential elements: 1. Agreement-offer and acceptance 2. Consideration 3. Competent parties 4. Legal purpose

Marketing (Distribution) Systems

Insurance companies market their products in different ways: through agents or direct solicitation to the customers.

Aleatory Contract

Insurance contracts are aleatory, which means there is an exchange of unequal amounts or values. The premium paid by the insured is small in relation to the amount that will be paid by the insurer in the event of loss.

Risk Management

Insurance is the transfer of financial responsibility associated with a potential of a loss (risk) to an insurance company, which in turn spreads the costs of unexpected losses to many individuals. Insurance redistributes the financial consequences of individual losses to all persons injured. With insurance, the cost of the loss up to the amount of the policy face amount will be covered by the insurance provider. Yet, the cost of the loss may exceed the limit of insurance.

Insurance Concept

Insurance transfers the risk of loss from an individual or business entity to an insurance company, which in turn spreads the costs of unexpected losses to many individuals. It is protection.

Not Catastrophic

Insurers need to be reasonable certain their losses will not exceed specific limits. That is why insurance policies usually exclude coverage for loss caused by war.

Property and Casualty Example:

John purchases a homeowners insurance policy for $100,000. His monthly premium is $100. If John only had the policy for 2 months, which means he only paid $200 in premiums, and the home was unexpectedly destroyed by a covered peril, John will receive $100,000. A $200 contribution on the part of the insured in exchange for $100,000 benefit from the insurer illustrates an aleatory contract.

Life and Health Example:

John purchases a life insurance policy for $100,000. His monthly premium is $100. If John only had the policy for 2 months, which means he only paid $200 in premiums, and he unexpectedly died, his beneficiary will receive $100,000. A $200 contribution on the part of the insured in exchange for $100,000 benefit from the insurer illustrates an aleatory contract.

Types of Insurers: Mutual Companies

Mutual companies are owned by the policyowners and issue participating policies. With participating policies, policyowners are entitled to dividends, which, in the case of mutual companies, are a return of excess premiums and are therefore nontaxable. Dividends are generated when the premiums and the earnings combined exceed the actual costs of providing coverage, creating a surplus. Dividends are not guaranteed.

Professionalism

Producers are required to perform in a professional manner at all times. Means that a person is engaged in an occupation requiring an advanced level of training, knowledge, or skill. Being professional means placing the public's interest above one's own in all situations. Any deviation could result in a penalty.

Code of Ethics

Producers must adhere to certain established procedures, and failure to comply will result in penalties. Some of the market conduct regulations include, but are not limited to, the following: -Conflict of interest; -A request of a gift or loan as a condition to complete business; -Supplying confidential information.

Ways to Transfer Risk

Some ways to transfer are holding harmless agreements and other contractual agreements, but the safest and most common method is to purchase insurance coverage.

Authority and Powers of Producers

The agency contract details the authority an agent has within his/her company. Contractually, only those actions for which the agent is authorized can bind the principal (insurer). In reality, an agent's authority is much broader. There are 3 types of agent authority: express, implied, and apparent.

Financial Status (Independent Rating Services)

The financial strength and stability of an insurance company are two vitally important factors to potential insureds. The financial strength of an insurance company is based on prior claims experience, investment earnings, level of reserves (amount of money kept in a separate account to cover debts to policyholders), and management, to name a few. Guides to insurance companies' financial integrity are published regularly by the following various independent rating services: -AM Best -Fitch -Standard and Poor's -Moody's -Weiss

Transfer

The most effective way to handle risk, so that the loss is borne by another party. Insurance is the most common method of transferring risk from an individual or group to an insurance company. Though the purchasing of insurance will not eliminate risk of death or illness, it relieves the insured of the financial losses these risks bring.

Competent Parties

The parties to a contract must be capable of entering into a contract in the eyes of the law. Generally, this requires that both parties be of legal age, mentally competent to understand the contract, and not under the influence of drugs or alcohol.

Legal Interpretations Affecting Contracts

The purpose of insurance is to restore, but not let an insured or a beneficiary profit from the loss.

Legal Purpose

The purpose of the contract must be legal and not against public policy. To ensure legal purpose of a Life Insurance policy, for example, it must have both: insurable interest and consent. A contract without a legal purpose is considered void, and cannot be enforced by any party.

Adverse Selection

The tendency of risks with higher probability of loss to purchase and maintain insurance more often than the risks who represent lower probability.

Offer and Acceptance

There must be a definite offer by one party, and the other party must accept this offer in its exact terms. In insurance, the applicant usually makes the offer when submitting the application. Acceptance takes place when an insurer's underwriter approves the application and issues a policy.

Reduction

We cannot avoid risk entirely, we often attempt to lessen the possibility or severity of a loss. So, taking actions such as installing smoke detectors in our homes, having an annual physical, or making a change in our lifestyles.

Example: Law of Large Numbers

When an insurance company issues a policy on a 35-year-old male, the company really has no way of knowing or accurately predicting when he will die. However, the Law of Large Numbers looks at a large group of similar risks - 35-year-old males of similar lifestyles and health conditions - and makes some conclusions based on statistics of past losses. This allows the insurance company to have a general idea about the predicted time of death for this type of insured and to set the premiums accordingly.

Due to Chance

a loss that is outside the insured's control.

Definite and Measurable

a loss that is specific as to the cause, time, place and amount. An insurer must be able to determine how much the benefit will be and when it becomes payable.

Sharing

a method of dealing with risk for a group of individual persons or businesses with the same or similar exposure to loss to share the losses that occur within that group. A reciprocal insurance exchange is a formal risk-sharing arrangement.

Hazards

are conditions or situations that increase risk or probability of loss. Classified as physical, moral, or morale. Conditions such as lifestyle and existing health, or activities such as scuba diving, are hazards and may increase the chance of a loss occurring.

Types of Insurers: Stock Companies

are owned by the stockholders who provide the capital necessary to establish and operate the insurance company and who share in any profits or losses. Officers are elected by the stockholders and manage stock insurance companies. Traditionally, stock companies issue nonparticipating policies, in which policyowners do not share in profits or losses. A nonparticipating (stock) policy does not pay dividends to policyowners; however, taxable dividends are paid to stockholders.

Representations

are statements believed to be true to the best of one's knowledge, but they are not guaranteed to be true. For insurance purposes, representations are the answers the insured gives to the questions on the insurance application.

Peril

are the causes of loss, insured against in an insurance policy. -Life insurance: insures against the financial loss caused by the premature death of the insured; -Health insurance: insures against the medical expenses and/or loss of income caused by the insured's sickness or accidental injury; -Property insurance: insures against the loss of physical property or the loss of its income-producing abilities; Causality insurance: insures against the loss and/or damage of property and resulting liabilities.

3 Types of Agent Authority- Apparent

authority (also known as perceived authority) is the appearance or the assumption of authority based on the actions, words, or deeds of the principal or because of circumstances the principal created. For example, if an agent uses insurer's stationery when soliciting coverage, an applicant may believe that the agent is authorized to transact insurance on behalf of the insurer.

3 Types of Agent Authority- Express

authority is the authority a principal intends to grant to an agent by means of the agent's contract. It is the authority that is written in the contract.

Misrepresentations

could void the contract. A material misrepresentation is a statement that, if discovered, would alter the underwriting decision of the insurance company. Furthermore, if material misrepresentations are intentional, they are considered fraud.

The Law of Agency

defines the relationship between the principal and the agent/producer: the acts of the agent/producer within the scope of authority are deemed to be the acts of the insurer. In this relationship, it is a given that: -An agent represents the insurer, not the insured; -Any knowledge of the agent is presumed to be knowledge of the insurer; -If the agent is working within the conditions of his/her contract, the insurer is fully responsible; -When the insured submits payment to the agent, it is the same as submitting a payment to the insurer. The agent is responsible for accurately completing applications for insurance; submitting the application to the insurer for underwriting; and delivering the policy to the policyowner.

Market Conduct

describes the way companies and producers should conduct their business

Statistically Predictable

insurers must be able to estimate the average frequency and severity of future losses and set appropriate premium rates.

Speculative Risk

involves the opportunity for either loss or gain. An example is gambling, and these types of risks are not insurable.

Estoppel

is a legal process that can be used to prevent a party to a contract from re-asserting a right or privilege after that right or privilege has been waived. Estoppel is a legal consequence of a waiver.

Warranties

is an absolutely true statement upon which the validity of the insurance policy depends. Breach of warranties can be considered grounds for voiding the policy or a return of premium. Because of such a strict definition, statements made by applicants for life and health insurance policies, for example, are usually not considered warranties, except in cases of fraud.

Contract

is an agreement between two or more parties enforceable by law. Because of unique aspects of insurance transactions, the general law of contracts had to be modified to fit the needs of insurance.

Types of Insurers

is any person or company engaged as the principal party in the business of entering into insurance contracts. There are several classifications of insurers depending on the type of ownership, location of incorporation, and other characteristics.

Fraud

is the intentional misrepresentation or intentional concealment of a material fact used to induce another party to make or refrain from making a contract, or to deceive or cheat a party. Fraud is grounds for voiding an insurance contract.

Concealment

is the legal term for the intentional withholding of information of a material fact that is crucial in making a decision. In insurance, concealment is the withholding of information by the applicant that will result in an imprecise underwriting decision. Concealment may void a policy.

Risk

is the uncertainty or chance of a loss occurring. There are two types of risk, pure and speculative, pure risk is the only insurable risk.

Waiver

is the voluntary act of relinquishing a legal right, claim or privilege.

Personal Contract

it is between the insurance company and an individual. Because the company has a right to decide with whom it will and will not do business, the insured cannot be changed to someone else without the written consent of the insurer, nor can the owner transfer the contract to another person without the insurer's approval. Life insurance is an exception to this rule: A policyowner can transfer (or assign) ownership to another person. However, the insurer must still be notified in writing.

Retention

method of handing risk. Is the planned assumption of risk by an insured through the use of deductibles, co-payments, or self-insurance. It is also known as self-insurance when the insured accepts the responsibility for the loss before the insurance company pays. The purpose is to: 1. Reduce expenses and improve cash flow; 2. Increase control of claim reserving and claims settlements; 3. Fund for losses that cannot be insured.

Avoidance

method of handling risk, which means eliminating exposure to a loss. For example, if a person wanted to avoid the risk of being killed in an airplane crash, he might choose never to fly in an airplane. Risk avoidance is effective, but seldom practical.

Unilateral Contract

only one of the parties to the contract is legally bound to do anything. The insured makes no legally binding promises. However, an insurer is legally bound to pay losses covered by a policy in force.

Contract of Adhesion

prepared by one of the parties (insurer) and accepted or rejected by the other party (insured). Insurance policies are not drawn up through negotiations, and an insured has little to say about its provisions. In other words, insurance contracts are offered on a take-it-or- leave-it basis by an insurer.

Pure Risk

refers to situations that can only result in a loss or no change. There is no opportunity for financial gain. It is the only type of risk that insurance companies are willing to accept.

Conditional Contract

requires that certain conditions must be met by the policyowner and the company in order for the contract to be executed, and before each party fulfills its obligations. For example, the insured must pay the premium and provide proof of loss in order for the insurer to cover a claim.

Loss

the reduction of value, decrease or disappearance of value of the person or property insured in a policy, cause by a named peril. Insurance provides a means to transfer loss. Basis for a claim.

Randomly Selected and Large Loss Exposure

there must be sufficiently large pool of the insured that represents a random selection of risks in terms of age, gender, occupation, health and economic status, and geographical location.

Insurance Companies Protection from Adverse Selection

they have an option to refuse or restrict coverage for bad risks, or charge them a higher rate for insurance coverage.

Type of Marketing Arrangements-Exclusive Agency System/Captive Agents

-1 agent represents 1 company -Commissions on personal sales -Exclusive -Renewals can only be placed with the appointing insurer

Type of Marketing Arrangements- Managerial System

-Branch manager (supervises agents) -Salaried -Agents can be insurer's employees or independent contractors

Type of Marketing Arrangements- Independent Agency System/ American Agency System

-1 independent agent represents several companies -Nonexclusive -Commissions on personal sales -Business renewal with any company

Indemnity

(sometimes referred to as reimbursement) is a provision in an insurance policy that states that in the event of loss, an insured or a beneficiary is permitted to collect only to the extent of the financial loss, and is not allowed to gain financially because of the existence of an insurance contract.