Overview of The Insurance Industry

Insurance

A contract that transfers financial risk from an individual or entity to another party, usually an insurance company.

Broker

A Broker represents themselves and the insured (i.e., the client or customer).

Agent:

A person who acts for another person or entity (known as the principal) with regard to contractual arrangements with third parties.

Stock Insurance Company:

A private organization organized and incorporated under state laws for the purpose of making a profit for its stockholders (shareholders). Also referred to as a nonparticipating company.

Reinsurer

An insurance company that provides reinsurance to other insurance companies.

Career Agent

Branches of major stock and mutual insurance companies that are contracted to represent an insurer.

Private (Commercial) Insurer

Companies owned by private citizens or groups which offer one or more lines of insurance. Commercial insurers are NOT government owned.

Indemnity:

Contracts of indemnity pay off financial losses and reimburse the insured after a loss.

Domestic Insurer

Insurer which has its principal or home office in a state where it is authorized.

Surplus Lines Insurance

Nontraditional insurance only available from a surplus lines insurer. Offers coverage for substandard or unusual risks not available through private carriers, commercial carriers, or an authorized insurer.

Fraternal Benefit Society:

Organization of people who share a common affiliation, usually religious. Operates on a charter system and usually provides insurance to its members

Claims Department

Responsible for processing, investigating, and paying claims.

Producer:

The representative of an insurance company who sells the company's products.

Implied Authority

The unwritten authority that is not expressly granted, but which an agent is assumed to have in order to transact the business of the principal.

Standard Market Insurer:

A standard market insurer is an insurer who offers rates for insurance coverage to insureds who have an average or better than average loss exposure.

Self-Insurers

An entity that establishes its own self-funded insurance plan to cover potential losses as opposed to transferring the risk to an insurance company.

Insured:

An individual or entity that is covered under an insurance policy.

Risk Retention Group

An insurance company formed to insure people in the same business, occupation, or profession against liability risks.

Multi-line Insurer

An insurance company or independent agent that offers multiple lines of insurance such as auto, homeowners, long-term care, life, and health insurance needs.

Mutual Insurance Company

An insurance company owned by its policyholders. The sole purpose of a Mutual Company is to provide insurance coverage to its members. Policyholders select company management and share in company profits through dividends.

Lloyds of London:

An insurance market acting as an intermediary between clients, brokers, underwriters, and insurance companies. Lloyds is not considered an insurance company.

Nonparticipating plan:

An insurance policy under which the policyholder is not entitled to share in the divisible surplus of the company.

Admitted (Authorized) Insurer

An insurer who has received a certificate of authority from a state's department of insurance authorizing them to conduct insurance business in that state.

National Association of Insurance Commissioners (NAIC)

An organization that provides data and analysis to insurance commissioners for the purpose of industry regulation.

Reciprocal Insurer

An unincorporated organization in which all members insure one another by risk pooling. The company is owned by the policyholders but managed by an attorney-in-fact.

Participating Plan

An insurance policy under which the policyholder shares in the company's earnings through receipt of dividends.

Captive Insurer

An insurer established and owned by a parent firm for the purpose of insuring the parent firm's loss exposure.

Foreign Insurer:

An insurer that is authorized in one state, but its charter or principal office is in another State.

Agent Authority

Given by an insurer to a licensee to transact insurance on the insurers' behalf.

Unfair Trade Practices Act

Gives the head of each state insurance department power to investigate insurance companies and producers, to issue cease and desist orders, and to impose penalties for using unfair trade practices.

Certificate of Authority

Issued to an insurer by a department of insurance (or equivalent state agency) which authorizes that company to conduct insurance business in that state.

Association for Cooperative Operations Research and Development (ACORD)

Publishes and maintains standard insurance forms for use in the insurance industry.

Marketing Department

Responsible for increasing the number of prospective applicants, thereby increasing the number of insureds, through various advertising mediums and 1-on-1 appointments with prospective buyers.

Independent Agent

Sells insurance policies through many different insurers instead of just one.

Insurance Services Office (ISO

Serves those in the business of insurance by providing statistical, actuarial, underwriting, claims information and analytics, and standardized policy forms.

Personal Producing General Agency System (PPGA)

Similar to the career agency system. However, PPGAs do not recruit, train, or supervise career agents.

Divisible Surplus

The amount of earnings paid to policyowners as dividends after the insurance company sets aside funds required to cover reserves, operating expenses, and general business purposes.

Premium (Consideration)

The amount of money an insured pays for an insurance policy.

Apparent Authority

The appearance or assumption of authority based on the actions, words, or deeds of the principal.

Express Authority

The authority a principal deliberately gives to its agent.

Underwriting Department:

The department within an insurance company responsible for reviewing applications, conducting investigations to gain additional information about applicants, assigning risk classifications, and approving or declining an application.

Sales Department

The department within an insurance company that completes the insurance application.

Liquidity

The measure of an insurers' ability to meet its financial obligations, including claims payments. Refers to cash on hand as well as other assets that can quickly be turned into cash such as short-term securities.

Solicitor:

A solicitor has authority to seek insurance applicants for a company but does not have any authority to bind coverage on behalf of a company.

Insurer:

An entity that underwrites an insurance risk. The financial risk of the insured is transferred to the insurer through a contract of insurance.

Alien Insurer

An insurer which is authorized in any State within the U.S., but its principal office is located outside this country.

Non-admitted (Unauthorized) Insurer

An insurer who has not received a certificate of authority from a state's department of insurance, which is required to conduct insurance business in that state.

Reinsurance

Insurance that an insurance company purchases from another insurance company. This provides financial protection for the purchasing company in the event of major claims losses.

Advertising Code:

Specifies what is and is not acceptable in regard to the advertising of insurance products.

Reserves

The accounting measurement of an insurer's future obligations to its policyholders.

Actuarial department

The actuarial department calculates policy rates, reserves, and dividends.

Primary Insurer:

The insurance company that transfers its loss exposure to another insurer in a reinsurance agreement.

Industrial Insurer:

A special branch of the industry primarily providing policies with small face amounts with weekly premiums. Also referred to as home service or debit insurers.