Chapter 3

Alien Company

A company that incorporated in a country other than the United States but doing business in the states is known as an alien company

Handles transactions related to the companys financial conditions

Accounting

Determines the rates to be charged for various types of insurance

Actuarial and statistical

Garraway Construction wants insurance to cover its multimillion dollar foreign contraction project. The company contracts a professional to represent Garraway in finding the best coverage for the money.

Broker

Makes sure insureds are properly indemnified for losses

Claims

Willoby Industries would like to purchase property insurance for its new warehouse

Commercial line

Toyland, INC has insurance that protects it against liability arising out of the toys it manufactures

Commercial lines

Janice provides advice about various insurance policies for a fee. She does not sell insurance.

Consultant

Oversees the companys investments to ensure that there are adequate funds to pay claims

Investment

Mabel wants insurance protection for her home

Personal line

The Jensens have insurance coverage for their two family cars

Personal lines

Performs a variety of functions such as checking applications for accuracy and completeness, rating policies, and printing and assembling policies

Policy issue and administration

Jim, an employee of the Goodwill Agency, spends his days collecting premiums and finding prospective clients. He has no authority to issue or countersign policies.

Solicitor

Decides whether to accept or reject applications on the basis of a company standards

Underwriting

Underwriting Department:

Underwriting - the process of selecting certain types of risks and rejecting others so the insurance company will have a book of business that will produce the company desired results. •the underwriting department is usually made up of many individual underwriters who decide whether to accept or reject the applications sent in by agents on the basis of the company standards and their own judgement

Apparent authority

a doctrine that holds that an agent may have what ever authority a reasonable person would assume the agent has. • in the publics eye, an agent acting under apparent authority binds the company as fully as under expressed or implied authority

Fiduciary

a person who stands in a special relationship of trust to another person •agents have fiduciary duties toward their clients, especially regarding handling premiums •Agents also owe a fiduciary responsibility to the insurer and must always make decisions in the insurer best interest

independent agency systems

agencies that are independent contractors contract with several different companies to represent and sell insurance for those companies.

Fraternal benefit society (insuring organization)

an incorporated society or order, without capital stock, that is operated on the lodge system and conducted solely for the benefit of its members and their beneficiaries and not for profit •fraternal offer insurance that is available only to their members •most write only life and health insurance

Claims adjusters

are used to inspect a loss, determine whether there is a coverage for the loss, estimate indemnification, and, in some cases, pay for the loss immediately •large companys have their own claim adjusters, whereas smaller companies may use the services of independent adjusters

Bonnie drives a school bus. She drives very carefully because she knows she is responsible for the lives of the children on board. This is an example of a

casualty risk

Commercial lines

coverages designed for businesses

Licensing

each state requires its agents to pass a licensing exam to receive a license to be able to sell insurance

Attorney-in-fact

empowered to handle all of the business of the reciprocal

Bill is licensed to handle highly specialized insurance coverages. He is authorized to obtain these coverages from insurance companies not admitted to do business in the state where he works.

excess line agent

Producer

general term used to describe someone who sells insurance such as an agent, broker, or solicitor

Excess or surplus lines

highly specialized insurance coverages, such as auto racing liability and tuition refund insurance, that are often not available from any company admitted to do business in a state

Incurred losses

include amounts paid on claims for covered losses and various expenses related to handling claims

Law of agency

knowledge of the agent is held to be the knowledge of the principal, for example suppose the applicant tells the agent something very important about the applicant insurability. The agent does not list this information on the application, the applicant is revealing the information to the insurance company through the knowledge of the agent.

Personal Lines

property and casualty coverages that protect an individual or family

Bart lives in the Midwest and wanted to insure his home against damage by a tornado or windstorm. This is an example of

property risk

Insurance Guaranty Association

provide funds for payment of unpaid claims when the insurer become insolvent •protect the public

Insurance agent

represents the insurance company, is the direct link between the company and its insureds •such responsibilities include: •selling insurance •issuing and countersigning policies •collecting •providing a link between the insured and the insurance company

Underwriting expenses

the costs required to acquire and maintain a book of business •includes expenses for advertising, commissions, salaries, and other administrative costs and regulatory costs such as taxes and licensing fees

direct response system

there are no agents, these companies sell through direct mail of over the phone

application

when the prospect buys, the agent must complete a detailed application •the application must be carefully, completely, and accurately filled out and submitted on a timely basis •once policy is in force the agent has a continuing responsibility toward the insured

Quotation

will show the prospect what they premium for the proposed coverage will be

Modifiers

• (one of either lowercase letters) may be added to assigned ratings, which are shown in upper case, to qualify the status of a rating •for example "g" is used to indicate a group rating involving a pool of affiliated companies •"e" indicated a parent company rating when the financial strength of the parent is used to evaluate a newly affiliated company •"w" caution -- meaning watch list, some decline has occurred but not enough to cause a drop in the assigned ratings •an overall rating might look like this: B+w --- Very good, but watch

A.M. Best, Inc. evaluation company approach

• A++, A+ --- superior, strongest position •A, A- --- Excellent •B++, B+ --- Very good •B, B- --- Good •C++, C+ --- Fair •C, C- --- Marginal •D --- Below minimum standards • E --- Under state supervision • F --- in liquidation

Self-insurance

•Business organizations that set up their own reserves for the purpose of insuring themselves •part or all of the risk of loss is borne without the benefit of insurance coverage to fall back on if a loss occurs •some large companies are self-insured because they have the resources to withstand losses and their claims experience demonstrates that it is cheaper to be self-isured then to pay for insurance coverage

Insurance companies 4 areas of responsibility

•Companies •Agents •Ratification •enforcement

Four basic distribution systems used to market insurance

•Exclusive agency system •Direct writer system •Direct response system •Independent agency system

Lloyd's Association

•Lloyds of London - voluntary association of individuals, or groups of individuals, who agree to share in insurance contracts. •each individual, or "syndicate", is individually responsible for the amount of insurance they write •limited number of Lloyd's associations in the United States •Lloyd's must appear in the companies name

Liability Risk Retention

•Passed in 1981 by congress •gave product manufacturers more options when insuring against product liability •allowed product manufacturers to establish group self-insurance programs or group captive insurance companies called -- risk retention groups "RRGs"

Foreign Company

•Within states other than the state in which it is incorporated and insurance company is a foreign company

Admitted or authorized insurer

•a company that meets the insurance departments standards and is authorized to do business in a state

Excess or surplus lines agent

•agent licensed by the state to handle the placement of such coverages with non admitted companies (ones that are not authorized to conduct business in the state or under ordinary circumstances)

Countersigning

•agent signs each new policy prepared by the company before delivering it to the insured •in most states the countersignature is required to validate the contract

Misrepresentation

•agents may not misrepresent or falsely advertise the terms or benefits of a policy or the financial conditions of the company •the agent must make complete, accurate statements about the product being sold

suspense or diary system

•alerts the agent before the policy renewal time •this is appropriate for the agent to ensure that the insured's coverage is still adequate and that there have been no significant changes

Domestic Company

•although a company may conduct business in several states, it is formed and incorporated in only one state •Within its home state, and insurance company is known as a domestic company

The Liability Risk Retention Act of 1986

•amended the 1981 act by giving the right to form RRGs and PGs to nearly all businesses •They are prohibited from writing workers' compensation and personal lines insurance

independent nonexclusive agent

•an agent who represents more than one company •agent collects commission on the policies sold but collects no salary from companies they represent

service needs

•at any time during the policy year, the agent must be available to assist the insured needs •such as name change or change in the method of premium payment, and maintain accurate records of all such changes requested by the insured

Implied authority

•authority given by the insurance company to the agent that is not foamily expressed of communicated •allows the agent to perform all of the usually and necessary tasks to sell and service insurance contracts and to fully exercise the agents express authority

Agents must:

•be loyal to the insurer's interests and avoid engaging in any business activity that competes or interferes with the insurers business •obey all legal instructions provided by the insurer •deposit fund belonging to the insurer in a separate account in the insurers name •perform all duties with the degree of care and skill that a reasonably prudent person would exercise in the same circumstances •keep the insurer informed of all the facts related to the agency relationship

Legal Department

•because insurance policies are legal contracts •interprets various states insurance laws and helps the company keep its policies and practices in compliance •a key role is the departments involvement with court cases arising from claims •is instrumental in helping determine fair indemnification for insureds and is involved in the companies other legal actions

Marketing Department

•closely related to the agency department •helps determine the companys overall marketing strategy •develops advertising and sales aids or works closely with a separate advertising department to accomplish these goals

National Association of the Insurance Commissioners (NAIC)

•commissioners of each of the states together make this up •meet in regular intervals to exchange information and provide coordination of the regulatory measures for each state

Health and Disability insurance

•designed to handle the risk of medical bills and loss of income resulting from injury or sickness

Life insurance

•designed to handle the risk of premature death or the risk that an individual may outlive his or her financial resources

Insurance department

•each state has an official charged with the responsibility for controlling insurance matters within that state •these officials are directors, superintendents, or commissioners of insurance •depending on the state but all perform similar duties

Underwriting

•employee of the insurance company who is responsible for the selection, classification, and acceptance or rejection of a proposed insured •underwriters do not make proposals, producers do

Loss control department

•engineering department •inspects factories, certifies boilers, and makes recommendations to insureds as to how risks may be avoided or reduced

Agency relationship

•exists when on party (an agent) is authorized to act on behalf of another (a principal). •in the insurance business, the principal is the insurance company and the agent is a person who is authorized to act on behalf of the company •principals grant certain powers, or authority to their agents and when agents act under these powers their acts are considered to be the acts of the principal •these acts include making contracts and accepting money

Audit Department

•for certain coverages, a premium is determined after or during the policy term, instead of at the beginning of the policy term •these after the fact premiums may be based on a number of factors such as payroll, number of employees, or amount of receipts •check on the accounting records of these insureds at the required intervals to obtain necessary information used to determine these types of premiums

Support departments

•help departments operate smoothly •include personnel, training, information systems, administration, forms and filings, and building and maintenance

Property insurance

•includes insurance designed to handle property risk -- risks that we will suffer financial loss because something we own is damaged or destroyed •the following types of insurance are generally considered property insurance: dwelling, homeowners, commercial property, inland marine, ocean marine, crime

Expense Ratio

•indicates the cost of doing business •Expense ratio = underwriting expenses/ written premium

Reinsurance Department

•insurance companies themselves often purchase insurance to cover their own exposure to loss •reinsurance helps protect insurance companies from catastrophic losses and from wild fluctuations in underwriting results •the coverage may be obtained on a policy-by-policy basis or on the bassi software a whole block of policies •the reinsurance may cover the initial insurer for losses above a certain amount or may call for losses to be shared on a pro rata basis

direct writer system

•insurance company agents are actual employees •they may receive a salary, be paid by commission or a combination of the two

Non-admitted or unauthorized insurer

•insurance company that is not authorized to do business in the state • may only to business in the state under special circumstances

professional designations

•insurance professionals may also learn from educational organizations •

solicitor

•like an agent, sells insurance and may even be authorized to collect premiums •cannot issue or countersign polices -- this is the responsibility that can only be handled by an agent •works with or for an agent

Policy Issue and Administration

•once the underwriter has approved a new application or a change to a current policy, the application is checked by a policy analyst or screener to make sure all information is correct and complete •if it goes to a rater, who computes the premiums to be changed •the policy forms may be printed by computer or assembled in an assembly and filing area. Copies of the policy will be mailed to the agent, the insured or both

Casualty insurance

•one of the most important risk covered by the casualty line is the liability risk -- the risk that we will suffer financial loss as a result of our actions towards others •example: the all-too-familiar auto accident in which Allen backs out of his driveway, hits Blanca's car, and causes $500 in damage. If the accident was Allen's fault, he is liable for the damage he caused to Blanca or her car. •classified as casualty: aviation, auto, workers' compensation, surety bonds

Investment Department

•oversees the companies needs to invest to make sure adequate funds will be on hand to pay claims •the investment department attempts to maintain a healthy rate of return while maintaining the safety of the investments •money must be on hand to pay future obligations •highly speculative stocks are not appropriate, and at least some of the investments must be readily convertible to cash, as needed

Earned premium

•premium the company actually earned by providing insurance protection for the designated period

Four lines of insurance

•property •casualty •life •health and disability An insurance company that writes only one line "category" is referred to as a monoline company An insurance company that writes more than one line of insurance is called a multiline company

Risk retention groups "RRGs"

•protects against product liability exposures and to purchase liability insurance on a group basis through "purchasing groups PGs" •owned by the policy owners of the same business group: only companies within the business group qualify (ex. car dealers) •a risk retention group may reinsure another risk retention group as long as they have a similar liability •the risk retention group must be approved by the commissioner and have a certificate of authority •risk retention groups & purchasing groups are regulated in the states where they are domiciled, but they can transact business in all other states (this exempts them from state insurance regulations and guaranty funds)

Assessment companies

•providing primarily fire and windstorm insurance for small towns and farmers •charge members a pro rata share of losses at the end of each policy period

Agency department

•recruiting, appointing, and training, especially if an agent will be an exclusive agent. •The department must monitor the sales and marketing efforts of these agents and make sure that the number and quality of agents are closely turned to the market the company serves

Advertising and selling insurance through the internet

•relatively recently developed in insurance marketing •insurance company websites offer information about insurers; the various lines of insurance provided; and links to regulatory information, financial ratings, and quotation services as well as locator services •the internet essentially dissolves state geographic boundaries, at issue is whether the insurance company is licensed to do business in the state, and whether the agent is properly licensed and appointed for the companies represented •other challenges include how to track premium taxes, how to ensure the security of personal info, how to audit internet transactions, whether internet advertisements comply with state laws, and what implications are for state guaranty associations •The NAIC has establish an Internet Marketing Issues Working Group to further explore these issues

Broker

•represents the insured •a company that is seeking insurance would contact a broker who in turn might contact several insurance companies and find the insurance that is best for the client •does not have the authority to bind an insurer to an insurance contract

Claims department

•sees that the companies insureds are adequately indemnified for their losses

Stock Company (first type)

•sells stock to stockholders to raise the money necessary to operate the business •stockholder are not necessarily insured by the company, and insureds do not necessarily own stock in the company •the company is in the business to sell insurance to the insured

Errors and omissions insurance (E&O)

•should be purchased by agents to protect themselves against legal liability arising from inadvertent errors or omissions

Combined Ratios

•simply the sum of the loss ratio and the expense ratio Combined ratio = loss ratio + expense ratio •traditionally 100% is considered to be the breakeven point. A combined ratio of less than 100% indicates that the company had an underwriting profit, a ratio of greater than 100% indicates a loss

Consultant

•someone who, for a fee, offers advice on the benefits, advantages, and disadvantages of various insurance policies •don't actually sell insurance, they sell advice

Express authority

•specifically given to an agent, either orally or in writing by the principal •written authority is usually provided through an agency agreement that allows the agent to countersign, issue, and deliver policies and provide other customary services on all contracts accepted by the insurer from the agent

Residual Market

•the government can provide insurance that is not ordinarily available from private insurers •the federal government provides "Federal Programs": •war risk insurance • nuclear energy liability insurance •flood insurance •federal crop insurance •at a state level the government is involved in providing unemployment insurance and may provide workers compensation benefits through state funds

Written premium

•the gross amount of premium income on the company books •it includes both earned and unearned premium •premiums for new business, renewals, and policy endorsements make up written premium

Exclusive or captive agency system

•the insurance company contracts with agencies, which are independent businesses, to represent and sell insurance only for that insurance company

Mutual insurance (second type)

•the insureds are also owners of the company •as owners they can vote to elect the management of the company •profits are returned to the insureds in the form of dividends or reductions in future premiums as end-of-year policy additions or cash •most are advance premium companies that charge non-assemble premiums(required to set money aside in a reserve in case claims experience is higher than expected.

Actuarial and Statistical Department

•the numbers department •suing tremendous amounts of data generated by computers, together with statistics available from other companies, •actuaries determine the rates to be charged for various types of insurance

Reciprocal company (third type)

•the word reciprocate means "to give and take" •a member of the reciprocal agrees to share the insurance responsibilities with all other members of the unincorporated group •in sense all members insure each other and share the losses with each other •managed by a attorney-in-fact

State Programs

•unemployment insurance •workers's compensation benefits

Loss Ratio

•used to compare the companies operations from year to year •shows the percentage of losses the company incurred for every dollar of earned premium •Loss ratio = incurred losses/ earned premiums

Field underwriting

•using reestablished criteria to seek out the type of business that is likely to be acceptable to the company •although the company underwriter makes the final decision to accept a risk, the agent also has a responsibility to seek out the quality of •before selling a policy the agent must obtain information on the prospects particular exposures and review existing policies •the agent must analyze the prospects coverage needs and make recommendations as to the amount and type of coverage appropriate for each exposure

Accounting department

•very closely regulated by the states •for example premiums must be created to specific accounts, agents must be paid commission, and proper reserves must be maintained