Chapter 1 - General Insurance

Avoidance

- Elimination of the risk - Avoid the activity that gives rise to the chance of loss - After potential areas of hazards have been identified, it may be found that some exposure to risk can be eliminated, but it is impossible to avoid all risk -A risk may be avoided by not accepting or entering into the event which has hazards. This method has severe limitations because such a choice is not always possible, or if possible, it may require giving up some important advantages.

Sharing

- Investments of a large number of people may be pooled by use of a corporation or partnership - Pooling or spreading the risk among a large number of persons or entities

Elements of Insurable risks must include:

- Large number of homogeneous units or groups with the same perils - Loss must be definite - Loss must be accidental and unexpected - Loss must cause financial hardship

Transfer

- Transferring the risk from one party to another, such as from a consumer to an insurance company - Transfer the uncertainty of loss via a contract

Reciprocal Insurance Company

-A group-owned insurer whose main activity is risk sharing by unrelated individuals. -Each member is known as a subscriber. -Exchange in run through an Attorney-In-Fact. -Assessment of additional premium can be made.

Stock Insurance Company

-A type of insurance company owned by stockholders. -Dividend is a return of profit. -Corporate dividends are taxable. -Nonparticipating polices.

Retention

-Assume the responsibility for loss -Self-insure the entire loss or a portion of the loss. Choosing deductibles is a method of risk retention. -It may be economically practical for an insured to not insure each exposure to loss and, instead insure only those risks that threaten financial stability or security

Lloyd's of London

-Group of syndicates who specialize in a particular risk. -Not an insurance company. -Provides a meeting place for syndicate members to transact business. -Members liable for each risk they assume.

Risk Retention Group (RRG)

-Group-owned insurer spreading liability risk of members with similar need. -Provides liability insurance for members. (example: owners of theme parks, water parks, go cart tracks, bounce house, skating rinks)

Mutual Insurance Company

-Owned by policyholders. -Policy dividends are returned to policy holders as a return of excess premium. -Dividends cannot be guaranteed and are not taxable. -Participating policies.

There are several "red flags" agents are trained to recognize, one in particular is a client buying a policy simply to hide or move illegal money. Most red flags involve practices that are outside the norm for life insurance transactions, such as:

-Paying for an entire policy up front with cash -Early cancellation of the policy, regardless of cancellation fees (surrender charges) -The heavy use of third parties for policy transactions -Strong reliance on wire or electronic fund transfers to foreign accounts

Fraternal Benefit Societies

-Social organizations that engaging in charitable activities. -Provide life insurance and annuities to members. -Non-profit organization based on lodge or fraternal system. -Offers insurance only to members of organization.

Question: To engage or participate in the insurance business, a prohibited person must first apply for a(n): a. Insurance consultant's license b. 1033 waiver for consent to work c. Producer's license d. Waiver of felony conviction

1033 wavier for consent to work

Direct Writing System

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

Risk

A condition where the chance, likelihood, probability or potential for a loss exists. -Uncertainty concerting a loss

Limited Access to Information

A consumer reporting agency may not provide a credit report to any party that lacks a permissible purpose, such as the evaluation of an application for a loan, credit, service, or employment. Permissible purposes also include several business and legal uses.

Correct or Delete Inaccurate Information

A consumer reporting agency must correct or, if necessary, delete from a credit file the information that is found to be inaccurate or can no longer be verified. The consumer reporting agency is not required to remove accurate data from a file unless it is outdated. Adverse information that is more than 7 years old (10 years for bankruptcies) must be removed from the file.

Reinsurance

A device used by insurers to transfer/share in a risk.

Question: A producer has each of the following responsibilities to the insurer EXCEPT: a. A fiduciary duty b. Reporting material facts that may affect underwriting c. A duty to recommend only high premium policies d. Forwarding premiums to the insurer on a timely basis

A duty to recommend only high premium policies

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 does not have legal authority to bind the insurer. Broker licenses are not applicable in all states. -Does not represent an insurer, but negotiates contracts on behalf of the applicant. -Not legal authority to bind the insurer.

Surplus Lines Agent/Broker

A party licensed to write insurance coverage with non-admitted insurers when such coverage cannot be placed with an admitted insurer.

Producer (Agent)

A person or agency appointed by an insurance company to represent it and to present policies on its behalf. -Represents the Insurer in the transaction of insurance - Responsibilities to the insurer: - Producers have a fiduciary duty to the insurer when handling premium funds in an account separate from personal funds. - Report any material facts that may affect the underwriting of a policy. - Duty to recommend purchase of only suitable policies

Physical Hazzard

A physical condition that increases the likelihood or probability of loss; may include the use, condition, or occupancy of property. Physical hazards may be seen, heard, felt, tasted, or smelled.

Inaccuracies

Agency must forward to applicant inaccurate information given out within previous 2 years.

Career Agency System

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

TEST TIP

Agents- ALWAYS represent the insurance company Brokers- ALWAYS represent the insured's Consultants- Charge a fee, give advice Principal- Is the insurance company Fiduciaries- Anyone trusted to handle other people's money or items of value

Independent Agency

An agent or agency that enters into selling agreements with more than 1 insurer; an unlimited number of insurers may be represented. The agency retains ownership of the business written. The independent contractors are paid a commission and must cover the cost of agency operations.

Morale Hazzard

An attitude of indifference toward the risk of loss that increases the probability of a loss occurring.

Adverse Selection

An imbalance created when risks that are hard to insure (more prone to losses than the average (standard) risk) are the only risks seeking insurance within a specific marketplace. For example, only those living in earthquake-prone areas seek to buy earthquake insurance or those in the poorest of health seeking to acquire life or health insurance. High risks exposures tend to seek or continue insurance at a higher participation rate than the average risk exposures do.

The Insurance Contract

An insurance contract is a legal contract purchased to indemnify the insured against a loss, damage, or liability arising from an unexpected event. The exchange of a relatively small and definite expense for the risk of loss that, if it occurs, may be large or small. The insurance contract is designed to transfer risk from the insured to the insurer.

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.

Foreign Insurer

An insurer organized under the laws of any other state, possession, territory, or the District of Columbia 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.

Law of Large Numbers

As the number of units in a group increases, the more likely it is to predict a particular outcome.

Claims Department

Assists the policyholder, insured, or beneficiary in the event of a loss and processes, and pays the amount of the claim in a timely manner based upon the contractual provisions and the amount insured.

Apparent

Authority created when the producer exceeds the authority expressed in the agency contract. This occurs when the insurer takes no action to counter the public impression that such authority exists. An example would be the producer's issuance of a binder when, in fact, the producer has not been granted the authority to issue binders.

Express

Authority that is expressed (written) into the producer's contract. An example would be the producer's binding authority if written in the contract. A producer's contract may also express what the producer may not do, such as creating their own advertisements.

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.

Breach of Trust

Based on fiduciary relationship of parties and the wrongful acts violating the relationship

Disclosure upon request

Consumer reporting agencies must provide the information on file if requested.

Applicant challenge

Credit reporting agency must reinvestigate within 6 months, if applicant challenges accuracy.

Moral Hazzard

Dishonest tendencies that increase the probability of a loss; certain characteristics and behaviors of people. Moral hazards most closely related to some form of lying, cheating, or stealing.

TEST TIP

Domestic - 1 state only - the home state Foreign - 49 other states - all states except the home state Alien - Headquarters operations are in another country

Financial Rating Services

Evaluate and rate the financial stability of insurance companies. Ratings are available to the public. Assign rating codes to show finical strengths and weaknesses of each company rated.

Question: A federal regulation called the protects consumer privacy a. Consolidated Omnibus Budget Reconciliation Act b. Fraudulent Insurance Act c. Privacy Protection Act d. Fair Credit Reporting Act

Fair Credit Reporting Act

Questions: A person with a legal or ethical relationship of trust with another party is a: a. Adjuster b. Fiduciary c. Principal d. Beneficiary

Fiduciary

Surplus Lines Insurance

Finds coverage when insurance cannot be obtained from admitted insurers. Each state regales the procurement of Surplus Lines insurance in its state. Can be placed through non-admitted carriers. Non-admitted business must be transacted through a Surplus Lines Brokers or Producers.

Penalties

Fines and possible prison time. Applicants who have been convicted of a felony must apply for Consent to Work (1033 Waiver) in the business of insurance—prior to applying for an insurance license. Producer must apply for this consent in their state of residence. Officers and employees must apply for the consent in the state where their home office is located. Convicted felons must apply for consent in order to discover if they are permitted in, or prohibited from, the insurance business.

Question: Which of the following is an insurance company that is organized under the laws of a different state within the United States? a. Domestic b. Alien c. Foreign d. Authorized

Foreign

Fraud and False Statements (Fraudulent Insurance Act)

Fraud always involves an intentional 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. 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.

Actuarial Department

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

Non-admitted (Non-authorized) 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.

Investigation of Disrupted Information

If a consumer's file contains inaccurate information, the agency must promptly investigate the matter with the source that provided the information. If the investigation fails to resolve the dispute, a statement may be added to the credit file explaining the matter.

Consent Withdrawal

If conditions of consent are not continually met, the consent may be withdrawn.

Reciprocity

If consent is granted by any state, other states must allow the applicant to work in their states as well.

Question: Which of the following type of authority does the public assume the agent has when quoting insurance? a. Apparent b. Implied c. Authorized d. Express

Implied

Risk Sharing Plan

Insurers agree to apportion among themselves those risks that are unable to obtain insurance through normal channels.

Direct Mail or Direct Response Company

Insurers sell insurance policies directly to the public via licensed employees or contractors. They use a marketing system that utilizes mass media, such as direct mail, newspapers, magazines, radio, television, internet, web sites, call centers, and vending machines.

Question: Each of the following must be included in an insurable risk, except: a. Calculable chance of loss b. Accidental losses c. Large group with different risks d. Excluded catastrophic perils

Large Group with Different Risks

TEST TIP

Main purpose of the Department of Insurance's is to: - Protect the general public - Protect the public against insurer insolvency

Reduction

Minimizing the chance of loss, but not preventing the risk. For example: sprinkler systems, burglar alarms, pollution controls and safety guards on machinery, or taking medications and having preventive medical care

Question: Dishonest tendencies that increase the probability of loss are what types of hazard? a. Emotional b.Physical c. Moral d.Legal

Moral

Question: What insurance company is owned by its policy holders? a. mutual b. Fraternal benefits society c. Stock d. Reciprocal

Mutual

Managerial Agency System (Branch Office System)

Operates with a branch manager that is a Salaried Employee of the insurer and is in charge of sales.

Executives

Oversee the operation of the business.

Loss

Reduction, decrease, or disappearance of value. A loss is the basis of a claim under the terms of an insurance policy.

Question: If an insurance company wants to transfer all or part of the risk it has accepted, it would buy which of the following types of insurance? a. Insurer b. Reciprocal c. Residual d. Reinsurance

Reinsurance

Facultative

Reinsurance agreement that allows the reinsurance company an opportunity to reject coverage for individual risks, or price them higher due to their substandard (higher risk) nature

Treaty

Reinsurance agreement that automatically accepts all new risks presented bye the ceding insurer (the company seeking or requesting the reinsurance from the reinsurer)

TEST TIP

Remember to restore back to pre-loss/not to profit-not to gain. To be indemnified is to be restored.

Disallowed Information

Report must not include lawsuits over 7 years old or bankruptcies more than 10 years old.

A Joint Underwriting Association or Joint Reinsurance Pool

Requires insurers writing specific coverage lines in a given state to assume their share of profits/losses of the voluntary market premiums written in that state.

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.

TEST TIP

Risk - Chance of loss Hazard - INCREASES chance of loss Peril - Cause of loss Speculative Risk - Loss or gain Pure Risk - Loss or no loss/NO CHANCE of gain

Speculative Risk

Situations where there is a chance or possibility for loss, no loss or gain (i.e., gambling)

Pure Risk

Situations where there is no chance for gain; the only outcome is for nothing to occur or for a loss to occur. Examples: - Damage to property caused by a fire or other natural disaster - Financial loss as a result of injury, illness, or death

Consultants

Some states do not recognize consultants or financial planners. In those states that do recognize them: - The offer advice, counsel, and opinions in service in respect to the benefits, and the advantages or disadvantages of any insurance policy or contract completed consulting service. - 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. - Insurance consultants are not bank trust officers, attorneys, or certified public accountants,

TEST TIP

Stock companies typically pay dividends to their shareholders, NOT the policyholders, therefore; stock companies are commonly considered to be non-participating.

Insurability

The ability of an applicant to meet an insurer's underwriting requirements.

Personal Producing General Agent

The agent sells insurance for the carriers it is contracted with and maintains its own office and staff. These agents do not recruit career agents.

Peril

The cause or source of a loss

Loss Exposure

The condition of being at risk of loss. Simply by existing, property and people are subject to many different risks. To an insurance company, each insured person or their covered property represents the risk of loss and the value of each potential claim is a known loss exposure.

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

Note:

The insured cannot require the insurer to correct any reports.

Exclusive or Captive Agency System

The insured interacts with the insurer through an exclusive or captive agent, representing only one company, or a group of companies that have common ownership. The insurer retains ownership rights to the business written by the agent and may or may not provide the agent with office and agency support services. The agent is an employee or a commissioned independent contractor.

Principle of Indemnity

The insured should be restored to the same financial or economic condition that existed prior to the loss, depending on the amount and type of insurance purchased. The insured should not profit from an insurance transaction, but be made "whole" again.

Violent Crime Control and Law Enforcement Act of 1994 (18 USC 1033, 1034)

The largest crime bill in U.S. history expands funding to federal agencies such as the FBI, DEA, and INS and includes provisions that address (among other topics) domestic abuse and firearms, gang crimes, immigration, registration of sexually violent offenders, victims of crime, and fraud. -Prohibits certain individuals from engaging in the business of insurance. -Felony crime conviction involving dishonesty or trust. - Imposes fines and penalties - Requires Consent to Work applications

Underwriting

The process of selecting, classifying, and rating a risk for the purpose of issuing or not issuing insurance coverage.

Law of Agency

The relationship of a person, called the agent or producer, who acts on behalf of another person, company, or government, known as the principal. The principal is responsible for the acts of the agent, and the agent's acts bind the principal. An act of an agent is the act of the principal. -Relationship between two or more parties where one party, the agent or producer, acts on behalf of the other party, the principal. -The agent or producer binds the actions and words of the principal.

Insurer (principal)

The source of authority from which the producer must allow. The insurer appoints the producer to act on its behalf in transacting the business of insurance. It is responsible for all acts of its producers when a producer is acting within the scope of authority. A producer may be personally liable when their actions exceed the authority of their contract. - The source of authority in which the producer must abide. - The insurer, or principal, is responsible for the acts on the producer when acting within the scope of the contract. - When the producer exceeds the authority in the agency contract, the producer may be personally liable for his/her actions.

Gramm-Leach-Bliley Act (the Financial Services Modernization Act of 1999)

This 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.

Mass Marketing

This type of marketing uses the direct response or direct mail method to target a specific type of insurance to a large group of individuals, such as (AARP). The insurer may benefit through reductions in marketing costs and underwriting expenses may be lower when coverage is offered to a limited population. Associations may receive some finical benefit from allowing an insurer to market directly to its membership.

TEST TIP

To sell part or to cede part of a risk to another insurance company.

Question: Which insurance company department accepts the insurance risk? a. Executive b. Claims c. Underwriting d. Actuarial

Underwriting

USA PATRIOT Act (Financial Anti-terrorism Act) and Anti Money Laundering (AML)

With the increase of drug trafficking and acts of terrorism, the desire and demand for laundered money has also increased. 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. These new requirements and standards were necessitated by the USA PATRIOT Act. This act specified which financial institutions would be required to institute AML training programs and this included insurance companies. The act specified which insurance products require anti-money laundering training and how to respond to suspected laundering activity. It also helped expand the definition of money laundering to include the money's ultimate purpose as well as its origin. The insurance products being used are mostly single premium permanent life insurance and annuity products, as they generate cash value.

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.

Fair Credit Reporting Act (FCRA)

protects consumer privacy and protects the public from overly intrusive information collection practices. It ensures data collected by an insurer is confidential, accurate relent, and used for a proper and specific purpose.

Dishonesty

refers to misrepresentation, untruthfulness, and falsification.