Chapter 1: Basic Principles of Life and Health Insurance

Pure assessment mutual company

Operates on the basis of loss-sharing by group members. No premium is payable in advance. Instead, each member is assessed an individual portion of losses that actually occur.

Social Insurance Programs

►Old-Age, Survivors, and Disability Insurance (OASDI), commonly known as Social Security ►Social Security Hospital Insurance (HI) and Supplemental Medical Insurance (SMI), commonly known as Medicare ►Medicaid

The stated amount or percent of liquid assets that an insurer must have on hand that will satisfy obligations to its policyholders is called A. Credits B. Reserves C. Surplus D. Retention

B. Reserves

Advance premium assessment mutual company

Charges a premium at the beginning of the policy period. If the original premiums exceed the operating expenses and losses, the surplus is returned to the policyholders as dividends. However, if total premiums are not enough to meet losses, additional assessments are levied against the members. Normally, the amount of assessment that may be levied is limited either by state law or simply as a provision in the insurer's by-laws.

Demutualization

Mutuals can convert to stock companies

Treaty reinsurance

A common reinsurance contract between two insurance companies Which involves an automatic sharing of the risks assumed.

Stock Companies - Nonparticipating

A private organization, organized and incorporated under state laws for the purpose of making a profit for its stockholders It is structured the same as any corporation Stockholders may or may not be policyholders. When declared, stock dividends are paid to stockholders. In a stock company, the directors and officers are responsible to the stockholders A stock company is referred to as a nonparticipating company because policyholders do not participate in dividends resulting from stock ownership.

Multi-line insurers.

Companies that sell more than one line of insurance

Reinsurer company

The company assuming the risk

Private Insurance Companies - Commercial

Commercial insurers offer many lines of insurance. Some sell primarily life insurance and annuities, while others sell accident and health insurance, or property and casualty insurance.

Strong Assessment Mutual/Insurers

Assessment mutual companies are classified by the way in which they charge premiums

What type of reinsurance contract involves two companies automatically sharing their risk exposure? A. Arbitrage B. Facultative C. Excess D. Treaty

D. Treaty

Industrial Insurer

Insurance is also sold through a special branch of the industry known as home service or "debit" insurers. These companies specialize in a particular type of insurance called industrial insurance, which is characterized by relatively small face amounts (usually $1,000 to $2,000) with premiums paid weekly.

3 types of insurance providers

Subscribers Health Maintenance Org (HMO) Preferred Provider Org (PPO)

Ceding company

The company transferring the risk

Captive Insurer

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

An agents authority to bind an insurer to an insurance contract may be granted in the A. Agent's contract and the insurance company's appointment B. Agents license and insurance company's certificate of authority C. Buyer's guide and policy summary D. State guaranty association

A. Agent's contract and the insurance company's appointment

Government as Insurer

As noted at the beginning of this unit, federal and state governments are also insurers, providing what are commonly called social insurance programs. Ranging from crop insurance to bank and savings and loan deposit insurance, these programs have far-reaching effects. Millions of people rely on these plans.

Which of the following is a syndicate established by a group of insurers to share underwriting duties? A. Reinsurer B. Lloyd's organization C. NAIC D. Multi-line insurers

B. Lloyd's org.

Self-Insurers

Though self-insurance is not a method of transferring risk, it is an important concept to understand. Rather than transfer risk to an insurance company, a self-insurer establishes its own self-funded plan to cover potential losses. Self-insurance is often used by large companies for funding pension plans and some health insurance plans. Many times, a self-insurer will look to an insurance company to provide insurance above a certain maximum level of loss. The self-insurer will bear the amount of loss below that maximum amount.

Preferred Provider Organization (PPO)

Under the usual PPO arrangement, a group desiring health care services (e.g., an employer or a union) will obtain price discounts or special services from certain select health care providers in exchange for referring its employees or members to them. PPOs can be organized by employers or by the health care providers themselves. The contract between the employer and the health care professional, whether physician or a hospital, spells out the kind of services to be provided. Insurance companies can also contract with PPOs to offer services to insureds.

Lloyd's of London

Lloyd's of London is not an insurer but rather a syndicate of individuals and companies that individually underwrite insurance. Lloyd's can be compared to the New York Stock Exchange, which provides the arena and facilities for buying and selling public stock. Lloyd's function is to gather and disseminate underwriting information, help its associates settle claims and disputes and, through its member underwriters, provide coverages that might otherwise be unavailable in certain areas.

Service Providers

Service providers offer benefits to subscribers in return for the payment of a premium. Benefits are in the form of services provided by the hospitals and physicians participating in the plan. They sell medical and hospital care services, not insurance. These services are packaged into various plans, and those who purchase these plans are known as SUBSCRIBERS.

Reciprocal Insurers

Reciprocal insurers are organized on the basis of ownership by their policyholders. However, with reciprocals, it is the policyholders themselves who insure the risks of the other policyholders. Each policyholder assumes a share of the risk brought to the company by others. Reciprocals are managed by an attorney-in-fact.

Reinsurers

Reinsurers are a specialized branch of the insurance industry because they insure insurers. Reinsurance is an arrangement by which an insurance company transfers a portion of a risk it has assumed to another insurer. Usually, reinsurance takes place to limit the loss any one insurer would face should a very large claim become payable. Another reason for reinsurance is to enable a company to meet certain objectives, such as favorable underwriting or mortality results. A common reinsurance contract between two insurance companies is called treaty reinsurance, which involves an automatic sharing of the risks assumed.

Mutualization

A stock company may be converted into a mutual company through this process

Liquidity

Indicates a company's ability to make unpredictable payouts to policyowners.

Reserves

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

Health Maintenance Organization (HMO)

Offer a wide range of health care services to member subscribers. For a fixed periodic premium paid in advance of any treatment, subscribers are entitled to the services of certain physicians and hospitals contracted to work with the HMO. Unlike commercial insurers, HMOs provide financing for health care plus the health care itself. HMOs are known for stressing preventive health care and early treatment programs.

Risk Retention Group

A risk retention group (RRG) is a mutual insurance company formed to insure people in the same business, occupation, or profession (e.g., pharmacists, dentists, or engineers).

Dividends from a mutual insurance company are paid to whom? A. Policyowners B. Beneficiaries C. Preferred stockholders D. Stockholders

A. Policyowners

Mutual Companies - Participating

Mutual insurance companies are also organized and incorporated under state laws, but they have no stockholders. Instead, the owners are the policyholders Anyone purchasing insurance from a mutual insurer is both a customer and an owner. He has the right to vote for members of the board of directors. By issuing participating policies that pay policy dividends, mutual insurers allow their policyowners to share in any company earnings. Referred to as participating companies because policyowners participate in dividends.

Policy dividends

Represent a "refund" of the portion of premium that remains after the company has set aside the necessary reserves and has made deductions for claims and expenses. Policy dividends can also include a share in the company's investment, mortality, and operating profits. Surpluses are typically distributed to policyowners on an annual basis.

Which of these describe a participating life insurance policy? A. Policyowners are entitled to receive dividends B. Policyowners pay assessments for company losses C. Stock companies allow their policyowners to share in any company earnings D. Policyowners are not entitles to vote for members of the board of directors

A. Policyowners are entitled to receive dividends

Fraternal Benefit Societies

Insurance is also issued by fraternal benefit societies, which have existed in the United States for more than a century. Fraternal societies, noted primarily for their social, charitable, and benevolent activities, have memberships based on religious, national, or ethnic lines. Fraternals first began offering insurance to meet the needs of their poorer members, funding the benefits on a pure assessment basis. Today, few fraternals rely on an assessment system, most having adopted the same advanced funding approach other insurers use. To be characterized as a fraternal benefit society, the organization must be nonprofit, have a lodge system that includes ritualistic work, and maintain a representative form of government with elected officers. Fraternals must be formed for reasons other than obtaining insurance. Most fraternals today issue group and annuities with many of the same provisions found in policies issued by commercial insurers.