General Insurance: Chapter 15

Insurer as Principal

the insurer is the source of authority, in which the producer/agent must abide a. when acting within the scope of authority, the insurer is responsible for all of the producer's/agent's acts b. when the producer/agent exceeds the authority in the agency contract, the producer/agent may be in the position of being personally liable for his/her actions.

Insurance

-a contract whereby one undertakes to indemnify against loss, damage, or liability arising from a contingent or unknown event

Moral Hazard

(dishonesty-giving false information on an application),

Morale Hazard

(indifference-driving without a seat belt, etc.)

Peril

- the cause of a possible loss

Agent's Authority

Express (Written), implied, and apparent

Elements of a Legal Contract

1. Agreement 2. consideration (premium) 3. Competent Parties 4. Legal Purpose

Operating and Distribution Systems

1. Branch office system 2. General Agency System 3. American Agency System 4. Direct Writeers

Characteristics of an insurance contract

1. contract of adhession 2. aleatory contract 3. personal contract 4. unilateral contract 5. conditional contract 6. contract of indemnity

Examples of government insurers

1. federal social insurance programs (social security, medicare, Medicaid) 2. federal crop insurance 3. federal crime insurance 4. federal flood insurance 5. federal riot reinsurance

Insurance Company Financial Structure

1. the department or division of insurance regulates all insurers doing business in a this state. Protection against the insolvency of an insurer is its major concern. 2. the department or division regulates the organization and ownership, capital and surplus requirements, reserves, accounting, investments, annual statements.

Agent responsibilities to applicant/insured

1. the producer/agent has the responsibility to seek and gain knowledge not just initially, but on an ongoing basis throughout his/her professional career. The sale and servicing of insurance is a professional endeavor and required in depth knowledge of policy coverages, provisions, limits, and risk evaluation. Only with this knowledge can one serve the best interests and needs of the applicant/insured. 2. as a the producer/agent serves in a fiduciary capacity to the insurer, his/her applicant and insureds rely upon them to forward premiums and to secure the coverages that address their exposures. The failure of a producer/agent to do so is a violation of trust and professional expectation, even though the producer/agent technically is a representative of the insurer

Agent responsibilities to the insurer

1. the producer/agent is responsible for presenting, modifying, effecting, accepting the performance of, or terminating the business contracts of the insurer 2. producers/agents have a fiduciary duty to the insurer when handling premium funds in an account separate from personal funds 3. after submitting an application, the producer/agent should report any material fact that may affect the underwriting of a policy to the insurer 4. the producer/agent is not required to emphasize profitable policies

two types of Reinsurance agreements

Automatic Agreements and Facultative agreements

Risk

a condition in which a chance of loss exists-there are two types: Speculative risks and pure risks

Valued Contract

a contact that pays a stated amount in event of a loss (disability or life insurance)

Executor contract

a contract that promises action in the event of a specified future occurrence

endorsement

a form changing the provisions and attached to a policy (also known as a rider)

Producers and law of agency

A relationship between two parties where one (the producer/agent) may act on the behalf of the other (the principal) and bind the actions or words of the principal

Methods of handling Risks

A. Risk Reduction B. Risk avoidance C. Risk Retention (self-insurance) D. Risk Transfer E. Risk Sharing

Admitted Insurers

Admitted insurers have been authorized by the commissioner of insurance (director or superintendent) to transact business in the state

Financial Rating Agencies

Agents are responsible for placing business with insurers that are financially sound. Several independent financial rating services provide are A.M Best, Standard and Poor's, Moody Investment Services, and the Weiss Insurance Ratings. Each service assigns rating codes to show strength or weakness of each company rated.

Type of Insurance Companies

Stock, mutual, fraternal associations, reciprocal,Lloyds Association, Retention Groups, and Captive

Surplus Lines Agent/Broker

a party licensed to write insurance coverage with nonadmitted insurers when such coverage cannot be placed with an admitted insurer.

attained age

a person's age at any point or time (age at policy issue, renewal or conversion)

Competent parties (insured and insurer)

a. the parties to a contract must have the legal capacity to enter into a contract

Fraternal Associations

a. these nonprofit organizations that operate on the basis of a lodge, society or order (i.e. Knights of Columbus) b. they normally sell only to their members

Facultative agreements

allow the ceding insurer and the insurance companies an opportunity to exchange advice about the underwriting of each case. Time consuming and higher premiums. These agreements are strictly between the insurers; all inquiries and transactions by the consumer regarding the process are through the ceding or originating company.

Domicile of Insurers

domestic, Foreign, and Alien

Investments Regulation

insurance regulations require that all investments be approved by the insurer's board of directors. Most investment s are required to be invested in something that is fairly stable

Risk Reduction

reducing, but not preventing the risk

Physical Hazard

tangible characteristics of a hazard

Lapse

termination of a policy because premium has not been paid by end of the grace period

effective

the date when insurance coverage begins (may also be known as inception date)

Actuary

a person trained in the technical aspects of insurance and related fields, particularly in mathematics and probabilities. Determines the probability of loss and sets the premium rates for the insurer

Nonresident Agent

a producer/agent who is licensed to write business in other states as well as his/her residence state

Loss

a reduction in, decrease or disappearances of value

Hazard

a specific situation that increase the probability of a loss arising from a peril or that may influence the extent of the loss-three types of hazard: Physeical, Moral, and Moral

Mutual Insurance Company

a. a mutual company is owned by its policyholders. Every policy holder is a member of the company b. policyholders choose a Board of Trustees or Directors to manage the company c. Profits are returned to policyholders as nontaxable dividends (return of unused premium) d. most mutual companies are nonassessable-they cannot charge members a pro rata share of loss and expense at the end of the policy period. e. traditionally, mutual insurers issued participating policies; however, today in most jurisdictions, a mutual insurer is free to issue nonparticipating policies

Stock Insurance Company

a. a stock company is owned by stockholders (shareholders) b. stockholders direct the company's operation by electing directors and officers to manage the company c. shareholders receive taxable stock dividends (return of profit) d. Traditionally, stock insurers issued nonparticipating policies; however today in most jurisdictions, a stock insurer is free to issue participating policies.

Differences between traditional and reciprocal insurances

a. an attorney-in-fact manages a reciprocal insurance company and doesn't need a license v. if funds are not sufficient to pay claims, the subscibers may be assessed additional premium c. each subscriber assumes a pro rata portion of the risk of all other subscribers.

Qualification requirements for Retention Groups

a. be made up of homogeneous units, enabling the use of the law of large numbers to predict losses b. have sufficient liquid assets to meet loss obligations c. each member assumes a portion of the risk; larger groups have larger asset pools to cover losses.

Legal Purpose (insurance policy)

a. insurance may not be issued for an illegal activity or immoral purposes b. every insured must have an insurable interest the absence of any these elements can void the contract

Reports and regulations used to protect the public

a. investments b. annual statement c. examination of insurer d. rehabilitation and liquidation

Lloyds Associations

a. not considered an insurance company b. provides meeting place and clerical services to its members, who actually transact the business of insurance (members are individually liable for the risk they assume) c. coverage provided is underwritten by a Syndicate Manager (also may be known as an attorney-in-fact) or an individual proprietor d. no corporations or other limitations on liability are permitted, so members expose their entire fortune on each risk they accept.

Agreement

a. offer (application)-a person makes the offer by submitting an application b. acceptance (issued policy)-the insurer promises to pay by issuing a policy or a binder.

Consultants

a. they offer advice, counsel, and opinions of service in respect to the benefits, and the advantages or disadvantages of any insurance policy or contract b. they are compensated by fee for service, commissions, or other legal considerations, and only one form of compensation may be paid per each completed consulting service. c. insurance consultants are not bank trust officers, attorneys or certified public accountants, who negotiate contracts on behalf of others or who provide general financial counseling when no commission or brokerage fee is paid for the service.

Fiduciary

an agent or broker who handles the insurer's funds in a trust capacity and submits all premiums promptly

American Agency System

an independent contactor sell and services insurance contracts and my represent an unlimited number of insurers

Producer/agent

an individual appointed by an insurer to represent the company and to present policies on it behalf

Annual Statement

every insurer authorized to transact business in the state must fule a financial report with the department or division annually. The financial report must be detailed so the department or division might see anything of financial concern.

Principle of Indemnity

in a property and casualty contract, the insured is restored to the same financial condition as prior to the loss. The insured should not profit from or lose from insurance transaction.

Speculative Risks

instances where there is a chance of loss or gain

Reciprocal Insurance Company

normally referred to as reciprocal exchange because it is unincorporated and each insured insures the other insureds in the association. This makes participants in the pool an insurer and insured unlike a traditional insured of a commercial insurer with just a premium payment obligation

Risk Avoidance

not being involved in the activity that gives rise to the chance of loss

Contract of Adhession

one party prepares a contract and submits it to the other party on a take it or leave it basis (without negation)

Broker

one that negotiates insurance in contracts on behalf of the insured, thereby representing the client's interest, not the insurer's

Tort Law

pertains to injuries suffered by a certain party that may be the result of another party's negligence. A Tort is civil wrong other than a crime or a breach of contract.

Contract Law

pertains to the formation and enforcement of contracts

Risk Sharing

pooling the risk of a large number of persons (corporation)

controlled business

possessing a license solely for the purpose of writing on one's own self, immediate family, relatives, employer and employees

earned premium

that portion of a premium for which protection has already been given

Insurability

the ability of an individual to meet an insurer's underwriting requirements

Direct Writers

the agent is either a salaried employee that offers contracts to the public through direct mail, news papers, radio, television, magazine advertising, and vending machines. The insurer markets the policies from the home office. A person interested in a policy will typically contact the insurer for information that is provided with an application to be completed and returned.

Apparent

the authority created when a producer/agent exceeds the authority expressed in his/her contract, and the insurer does nothing to counter the public impression that such authority exists (ex. Accepting premiums on lapsed policies)

Implied Authority

the authority that the public assumes the producer/agent has. This active authority when conducting the insurance business, such as filling out applications, providing quotes, and accepting premiums for the insurer

Automatic agreements

the ceding company insurer must transfer the amount of insurance in excess of the retention level immediately and automatically upon receipt of the premium. the transfer is automatic in accordance with the reinsurance agreement

face amount

the death or maturity benefit payable to a beneficiary or policy owner from life policy. Sometimes referred to as a limit liability

Loss exposure

the extent to which one may be affected by a peril

General Agency System

the general agent has a contract with the insurer to place business with that insurer and may also hire agents to work for him/her

Issue age

the individual's actual or closest age on the policy issue date

Adverse Selection

the insuring risk that is more prone to losses than the average risks. These risks tend to seek or continue insurance at a higher participation rate than does an average or above average (preferred) risk.

Express Authority

the power that is expressed (written) in the producer's/agent's contract (ex. Binding authority)

Risk Management

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

Underwriting

the process of evaluating a risk for the purpose of issuing insurance coverage

Alien

those insurer incorporated in another country. Any of them may conduct business in the state if they are permitted

Foreign

those insurer that are incorporated in any other state

Domestic

those insurers that are incorporated in the this state

Restricted parties in competent insurance contract

1. Minor 2. Mentally incompetent person 3. people under the influence of drugs or alcohol

Pure Risks

-situations where there are only chances of loss no gain

Applicant

-the party making application, offering himself or another person to be insured by contract

Risk Transfer

-transferring risk to another (insurance company)

Over Insurance

-when more insurance is in force than the insured has the potential to lose-doesn't apply for life insurance

Examination of Insurers

: the department or division conduct examinations on every insurer in this state. The examination may be as often as the department or division deems necessary.

Law of Large Number

A principle stating that the larger the number of exposures considered, the more closely the losses reported will equal the probability of loss. The probability of loss is predictable, thus a loss ratio is more readily available. This law is the basis for the statistical expectation of loss and is used by insurers to calculate rates (premiums) and predict losses over a given period of time.

Reinsurance/Risk Sharing

A device used by insurers to transfer or share in a risk. This process disperses the probability of a large loss and in turn provides coverage for a possibly otherwise uninsurable risk. There are at least two insurers involved, the insurer originating the application (ceding company) and the company or companies who share in the risk (reinsurance insurers or assuming companies). This agreement of reinsurance is strictly between the two companies and will be classified as either an automatic or facultative agreement

Types of Risk Management Characteristics

Insurance, insurable events, risk, loss, loss exposure, peril, hazard, and over insurance

Private vs. government insurers

Most insurance is written through private insurers, but there are instance where government based insurers stepped in to offer an insurance alternative when private insurers were unable to provide protection usually relating to 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.

Nonadmitted Insurers

Nonadmitted insurers have not sought approval from the department or have been unable to obtain such approval. Any insurer during business in this state must operate under a certificate of authority. Insurance that cannot be placed with a license admitted company may be placed with an authorized nonadmittd company by a surplus lines broker

Insurable events

any event, whether past or present, which may cause loss or damage to a person having to an insurable interest or create a liability against him/her

Branch Office System

branch sales manager is a salaried employee of the insurer and is in charge of sales

Rehabilitation and liquidation

regardless of the regulations and control, a few insurers find themselves in financial difficulty. When this happens, the department or division will step in and attempt to help the insurer become solvent again. only as a last resort are insurers declared insolvent, and the liquidation process started.

Hold Harmless Agreements

removes liability of one party from a second party. These agreements are used mostly in group health and replacements and could be considered as a measure of risk avoidance.

Riks Retention (Self-Insurance)

retaining the possibility for the loss

Individual Underwriting by the Insurer: Information sources and Regulation

Application, medical examination, attending physical statement (APS), medical information bureau (MIB)), Inspection Report, and agent's report

advertisement

-agents are governed under the rules and regulations, referred to as Unfair Trade Practices, with regard to what they can and cannot use or say when soliciting insurance.

Estoppel

-prevents the denial of fact if the fact was admitted to be true by a previous action

Do not Call Registry

-the Federal Trade Commission amended the telemarketing sales rule to give consumers a choice about whether they want to receive most telemarketing calls. It is illegal for most telemarketers or seller to all a number on the National Donot Call Registry. Companies must update their list at least once every 31 days.

Legal Interpretations affecting Contracts

1. Ambiguities in a contract of adhesion, contract of utmost good faith, representations, misrepresentation, warranties, concealment, fraud, waiver, estoppel, parol evidence rule

Issues relating to AIDS

1. Insurers are to avoid making or permitting unfair discrimination between individuals of the same class in the underwriting for the risks of Acquired Immune Deficiency Syndrome (AIDS) 2. insurers are to require the maintenance of strict confidentiality of personal information obtained through testing and to require informed consent before testing for HIV. (the HIV consent form specifies which type of individuals will receive test results) 3. Insurance companies may refuse to issue a policy to individuals based on positive HIV test results. 4. applicants should be informed that testing for HIV helps determine insurability.

Premium Concepts

1. Net Premium 2. Gross Premium 3. Reclassifications 4. Policy Reserves

methods of policy delivery

1. personal delivery, with signed receipt delivery 2. by registered or certified mail with a signed receipt delivery 3. deliver by reasonable means as determined by the commissioner, director, or superintendent of insurance. d. if an insurer doesn't deliver the policy by the means set forth above, the burden of proof shall be on the insurer to establish that the policy was delivered. e. a policy is deemed to have been received 6 months after the issue date if premium is paid f. conditional receipts are issued at time of application not at policy delivery

Nonmedical Application

1. policy requested when the applicant's age, medical history or amount of information coverage doesn't require a medical examination for underwriting. 2. health questions on the application are asked by the agent and are the only medical information required

Insurable Interest

1. possibility of an economic loss due to sickness or death 2. no one may purchase an insurance contract without the consent of the insured (the exception would be in the case of a parent purchasing insurance on the life of a minor child) 3. in life and health insurance, insurability interest must exist at the time of application (but not necessary at time of loss) 4. the insurable interest on one's own life generally regarded as unlimited 5. some insurers recognize love and affection as insurable interest, such as grandparent to a grandchild, brothers to sisters, marriage partners, etc. normally the love affection insurability interest requirements are not satisfied when trying to insure a mother-in-law, father-in-law, or someone with whom we have a long lasting relationship

Factors in premium determination

1. premiums are based on expected mortality , interest, and expenses 2. premiums will be invested and earn interest 3. interest earned on premiums assists in premium rate reduction

When calculating premiums, life insurers assume:

1. that all premiums are paid in advance of the period of coverage 2. that all premiums will be invested and earn interest 3. that all claims are paid at the end of a year

Individual and Group Selection Criteria

1. the Insurer uses all of the information collected, by the field underwriter and other sources, to determine the acceptability of an individual. It is ultimately the home office underwriter's responsibility to determine if this individual meets all the underwriting requirements set for by the insurer. 2. in group insurance, the group as a whole is considered as an individual and issuance is based upon that whole. Having one uninsurable individual in the group will not cause a declination but may increase the premium charged 3. in group insurance, the insurer may require evidence of insurability after an eligibility period has expired to minimize adverse selection 4. the most important source of underwriting information a completed application

Requisites for an ideally insurable risk

1. there must be a large number of homogeneous units to make losses reasonably predictable 2. the loss must be definite in terms of cause, time, place and amount (calculable) 3. the loss must be accidental 4. the loss must cause financial hardship 5. the policy must exclude catastrophic perils, such as war, nuclear hazard and illegal operations

Free Look Process

Insured has a specified period of days to review the policy and return it for a full refund

Policy Delivery

A. when the insurer determines that a particular applicant is an acceptable risk and has paid the premium, the insurer will send the policy to the agent for delivery to the insured. It is the agent's responsibility to deliver the policy and explain the policy to be sure the insured understand the benefits, including endorsements and riders. b. when the initial premium is not paid with the application, some insurers require that the agent sent a transmittal notice verifying the date he/she received the premium. the agent mist also get a statement from the applicant at the time of policy delivery that verifies that the insured has not suffered injury or illness since the application date. If the applicant is not in good health, the policy should be returned to the insurer or the agent may deliver the policy after the insurer grants permission.

Disclosure at point of sale

Agents should disclose all required information at the point of sale (i.e. HIPAA and HIV consent)

Completing the application

An application is a written formal request by an applicant to an insurer requesting the insurer issue a policy based upon information contained in the application. It is the agent's responsibility to probe beyond the stated questions (called filed underwriting). A copy of the application becomes part of the entire contract

USA Patriot Act of Anti Money Laundering (AML)

As of May 2006, insurance companies have been required to provide anti-money laundering training to their producers. Brokers as well as agents are required to undergo training as insurance products are now being used to give legitimate appearance to money financed by and for illegal activities

Fraud and false statements

Fraudulent Insurance Act a. all application and claim forms for group or individual insurance issued by an insurer shall clearly contain a warning substantially as follows: any person who with intent to defraud or knowing that he/she is facilitating a fraud against an insurer, submits an application, or files a claim containing a false or deceptive statement, is guild of insurance fraud. b. fraudulent insurance act means an act committed with the knowledge and intent to defraud in presenting, or causing to be presented, any information to an insurer, agent, broker or underwriter. The fraudulent insurance act is not intended to modify, in any way, the privacy of an individual. The act protects the agent, broker, and insurer if fraudulent information is presented and the agent, broker, or insurer presents it as the truth.

Premium Payment Mode

Mode reflects frequency of payment. Premium payments are made either monthly, quarterly, semiannually, or annually. Additional charges are included in modes other than annual to offset the lost interest earnings and increased administration costs. For this reason, the annual mode is the least amount total premium outlay.

Errors and Omissions

Professional liability insurance covering the liability of an agent or agency, typically written with a deductible to control the number of claim occurrences, which, in turn, reduces the frequency. Claims are filed due to client reports (Complaints) and for a number of reasons. The two most common are: Inadequacy and negligence

Representations

Statements made on the application by the applicant that are believed to be true to the best of his/her knowledge but are not warranted to be exact in every detail (maybe written prior to policy issuance) a. reasonable expectations doctrine-the reasonable expectations of policy owners and beneficiaries will be honored even though the strict terms of a policy do not support these expectations; what a reasonable and prudent buyer can expect.

Retention Groups

The 1986 risk retention Act made obtaining coverage more efficient, easing the process of forming a retention group and allowing certain groups that are difficult to insure the opportunity of coverage.

ambiguities in a contract of adhesion

any doubt or ambiguity found in the document is construed against the party who drew up the contract (insurer)

Rate-Making

Upon receipt of the necessary information, the home office underwriters analyze the information and determine if the applicant is an acceptable risk, such as accident history, exposure to environment hazards, and working conditions. If acceptable, underwriters determine the classification to be used in the calculation of the premium

the flat rate

a constant dollar amount added to the standard rate per $1000 of coverage. If the standard premium is $25 annually for $1000 of insurance, with a flat rate of $5/$1000 the flat rated premium is now $30. A student pilot or someone with hazardous hobby would be flat rated

application

a document that provides information for underwriting purposes. After the policy is issued, any unanswered question is considered waived by the insurer. The application becomes part of the entire contract

Misrepresentations

a false statement in the application that can render the contract void if material of acceptance of the risk (doesn't reflect the truth)

Inspection Report

a general report of the applicant's finances, character, morals, work, hobbies, and other habits (sometimes called consumer investigative Report)

Buyer's guide

a generic brochure developed by the NAIC to assist prospective buyers of life insurance. Decrpitions of all basic types of life insurance as well as comparative costs of each are offered.

Agent's Report

a personal statement submitted by the agent to the insurer regarding applicant's financial condition, any personal knowledge of the applicant, etc. this information remains confidential between the agent and the insurer, and it doesn't become part of the entire contract. These reports have only one purpose-proving insurability. The results of the medical examination is the only report that might be copied and made part of the policy. An IRS investigative report is never required to prove insurability.

Declined Risk

a risk for which an insurer refuses to issue insurance e. an individual's religious or political preference is never considered a rating factor in either life or health insurance.

Classification of Risks

a. Standard Risks b. Preferred Risks c. Substandard Risks (high exposure), declined risk

Captive Insurance Company

a. an insurance company organized in instances when insurance cannot be purchased from commercial insurance companies for a business risk. In many instances, companies within an industry form a joint captive insurance company for such a reason b. captives retain substantial portions of each loss and then purchase reinsurance above these levels through the international reinsurance market at a more favorable premium, with higher limits of coverage. c. captives provide an alternative funding mechanism when coverage breadth or capacity in traditional insurance markets doesn't meet the insured's needs and can provide cost savings cash flow benefits, and specialized loss prevention and claims services not otherwise available. d. given capital and operating expense requirements, captives are generally of interest only when applicable premiums are substantial ($2,000,000) e. investment returns can be obtained directly on the captive's invested capital f. the company has its own manager and typically conducts a formal officers meeting annually.

Consideration (Premium)

a. consideration generally means what the two parties to a contract give in exchange or value to abide by the conditions of the contract b. the insured's consideration is the payment of premium, or the promise to pay, plus an agreement to abide by the conditions of the contract. c. the insurer's promise to indemnify in the event of a loss is its consideration d. a mutual agreement is achieved when an insurer's agent delivers a policy to the policy owner who has paid the initial premium (the consideration). The policy limit and the initial premium are not of equal value

Red flags of Money Laundering

a. paying for an entire policy up front with cash b. early cancellation of the policy, regardless of cancellation fees c. the heavy use of their parties for policy transactions d. strong reliance on wire or electronic fund transfers to foreign accounts 3. agents/brokers are required to report any activity they believe or even have reason to supect is an effort to launder money. Depending upon a producer's involvement in the transaction, failure to comply can result in dismissal and civil or possibly even criminal prosecution.

Gross Premium

additional charges (loading) are added to the net premium rate to enable an insurer to meet all costs under the contracts, such as pperating expenses, commissions, medical examination costs etc

sale presentation

agents are required to present the following: Buyer's guide and policy summary

Collecting the innitial premium and issuing the receipt

an agent should attempt to college the initial premium and submit it along with the application to the insurer. This policy will not go into effect until it has been delivered and the first premium paid unless the agent issued a receipt. The types of receipts available are: Conditional receipt, unconditional receipt, and acceptance (approval) conditional receipt

Contract of Utmost Good faith

both parties bargain in good faith in forming the contract, and rely upon the statements and promises of each other (thererepre should be not attempts to conceal or deceive)

Conditional Contract

both parties to a contract must perform certain duties and follow rules of conduct to make the contract enforceable. The insurer must pay claims if the insured has complied with policy conditions.

Required Signatures

both the agent and the applicant must sign the application (applicant is representing that statemtnes on the application are true) unless a guardian is signing for a minor

the tabular Rate

classified to the extent of impairment according to the tables used.

Application Part I

contains general questions about the applicant, such as sex, marital status, residence, date of birth, occupation, and past and present life insurance. An important part of underwriting information

Application Part II

contains questions pertaining to medical background, present health, any medical visits in the recent years, medical status of living relative, and cause of death of deceased relatives

NAIC (National Association of Insurance Commissioners)

each member is the executive office of insurance in his/her respective state (commissioner, director, superintendent or the administrator officer of the state bureau of Insurance) 1. state Insurance Commissioners Association 2. the NAIC does not have any legal authority over insurance regulation, but promotes uniformity in the interpretation of insurance legislation and regulation 3. the association may make recommendations for a state policy 4. each commissioner may accept or reject the recommendations.

inadequacy

failing to obtain proper type or amount of coverage for client

Conditional Receipt

if premium is paid, coverage will be in effect the date of application or completion of the medical exam, unless it is declined within a stipulated period of time

Unconditional Reciept (binding Receipt)

if premium is paid, coverage will begin immediately for a specific length of time regardless of whether the applicant is ultimately approved by the insurer. This may also be referred to as a temporary insurance agreement

Substandard Risk (high Exposure)

individuals who are not acceptable at standard rates because of health, habits, or occupation and are issued rated policies as follows: the lien plan (graded), the rated up age, the flat rate, and the tabular rate

Standard Risks

individuals who bear the same health, habits, sex, and occupational characteristics as those reflected in the mortality table (average life expectancy)

Preferred Risks

individuals who meet certain requirements and qualify for lower premiums, such as ideal health, height and weight, lower occupational stress and higher levels of income

The lien Plan (graded)

initially, only the premium would be refunded in case of death. The death benefit increases over time with the full face amount eventually payable

Personal Contract

insurance policies cover insurable interest of the insured. The insured cannot transfer or assign any policy, except life insurance

Mortality Cost

interest (investment return)=net premium (pure rate)+loading (insurer's expenses)=Gross premium

Policy Summary

normally, a computer-generated illustration detailing 1. the premiums to be paid along with current and guaranteed interest rates 2. the guaranteed and non guaranteed cash value and if any, projected dividends. The summary is not required to show the time value of money 3. the surrender values and other guaranteed data pertaining to the policy that is being shown. The agent must include his/her name and address along with the address of the insurance company 4.the state generally requires that an insurer provides prospective purchasers a copy of Buyer's Guide and Policy Summary (illustration) at the time of application 4. in health insurance, the agent gives the client an outline of coverage, which is the equivalent of a policy summery in life insurance.

Unilateral Contract

only one party is legally bound to contractual obligations after the premium is paid to the insurer. Only the insurer can be charged with breach of contract

Aleatory Contract

parties to a contract exchange unequal amounts of money. In insurance, the premium paid is less than the potential benefit to be received in the event of loss. Performance depends on an uncertain future events. The exchange value may be unequal

the Fair Credit Reporting Act of 1971 (FCRA)

passed to protect an individual's right to privacy a. this act protects the consumer's right to privacy, making certain the data is confidential, accurate, relevant and properly used for a specific purpose, and also to protect the rights of the individual from overly intrusive information collection practices b. a credit report may be obtained to determine the financial and moral status of an applicant (such as employment screening, insurance underwriting or loan approval) c. when the application is taken, an agent must advise the applicant that he/she can review the files of the consumer agency that provided the credit report d. if the applicant challenges the information, the credit reporting agency is required to reinvestigate. Any inaccurate information the agency has given out within the last 2 years must be forwarded to the applicant e. when the consumer reporting agency receives a request to issue corrected information, they have a maximum of 6 months to investigate the facts. f. a person who has been denied insurance because of inaccurate information is entitled to certain rights g. the consumer report must not contain adverse information lawsuits over 7 years old or information on bankruptcies over 14 years old. h. the insured cannot require the insurer to correct any reports.

Medical Examination

provides physician or paramedic records of an examination regarding the applicant's present health. It is usually requested by the insurer after determining if the amount of coverage, age of applicant or his/her health history warrant the examination. It is more frequently requested due to the higher amounts of insurance applied for coupled with the high degree of cardiovascular concerns, high cholesterol and enzyme levels, as well as the prevalence of the HIV virus. Medical exams are the insurer's expense.

Negligence

quoting inflated information or misrepresenting a plan of coverage neglecting the effect the information might have on the client at a later date. Most errors and omissions claims occur and are paid after an agent replaces a group health plan. The agent may be guilty of negligence whether the mistakes are intentional or not

The rated up age

rates an insured at older than actual age

warranties

statements made in an application for insurance or material stipulations in the policy that are guaranteed as true in all respects. If untrue or if breached, the contract may be voided; may be past, present or future.

Parol evidence Rule

states that a contract may not be altered without the written consent of both parties (applied to written portion of contract)

Net Premium

takes into account interest and mortality factors only. The process of calculating this rate requires: a. the age and sex of the insured and the benefits to be provided b. the mortality rate to be used and the rate of interest assumed

Acceptance (approval) Conditional Receipt

the coverage becomes effective at application approval. If the company doesn't approve the application, coverage was never in effect.

Fraud

the intentional misrepresentation, deceit, or concealment of a material fact known to a person with the intention of causing injury to another party

Policy Reserves

the net premiums paid plus interest earned and reflect possible contract obligations

Contract of Indemnity

the principle establishes that the insured is restored to the same financial condition as before the loss, with no intent of loss or gain.

Stranger Originated Life Insurance (STOLI)/Investor originated life insurance (IOLI)

the terms describe investors, agents, or brokers with absolutely no personal or business connection with a person, who induce a purchase of a life insurance policy with the sole intent of selling that policy for quick cash

Waiver

the voluntary abandonment of a known or legal rights or advantage. An insurer's failure to enforce a provision of a contract

Concealment

the withholding of known facts that are so important that the disclosure of them would change the decision of an insurer with respect to underwriting, settling a loss, or determining premium (must be material to the loss)

Notice of Information Practice

this is regulated by the Fair Credit Reporting Act of 1971 (FCRA)

Attending Physican Statement (APS)

used in cases in which the individual application and/or medical reports reveal conditions of which more information is required. An applicant must sign a written release to enable a release of the APS.

Reclassifications

when reviewing an application, the underwriting may find it necessary to reclassify the risk. This could either increase or decrease the premium

Changes in the application

whenever an answer to a question needs to be corrected, agents have the option, depending on which insurer they represent, of correcting the information and having the applicant initial the change or competing a new application