Insurance Chapter 1- AD BANKER

Which of following individuals represents insurance company when selling an insurance policy?

PRODUCER-The producer or agent is licensed to represent insurance company when transacting insurance business.

Insurance Producers

are licensed individuals representing & appointed by an insurance company when transacting insurance business.

ALIEN INSURER

An insurer organized under the laws of any jurisdiction outside the United States, whether or not it is admitted to do business in this state. Example: An insurer incorporated in Ontario, Canada, is considered alien to New York.

Foreign Insurer

An insurInsure rorganized under laws of this State, but in one of other States or jurisdiction within United States, Whether or not it is admitted to do business in this State or Jurisdiction. Example: An insurer incorporated in New York is considered foreign to Kansas.

General Insurance — Lightning Facts

1. The State Commissioner, Supervisor, or Director of Insurance is the chief insurance regulator and has the power to issue rules and regulations to enforce state insurance statutes. 2. A stock insurance company issues non-participating policies and is owned by stockholders who may receive taxable corporate dividends as a share of the company's profit. 3. A mutual insurance company issues participating policies and is owned by the policyholders who may receive non-taxable dividends as a return of any divisible surplus. 4. Reinsurance is the transfer of risk between insurance companies. The reinsurer assumes some or all of the risk of the ceding, or primary, insurance company. 5. Domicile refers to the state in which an insurer incorporated. A domestic insurer is organized under the laws of the resident state, a foreign insurer is organized under the laws of another state within the United States, and an alien insurer is organized under the laws of a country outside the U.S. 6. An admitted insurer is authorized to do insurance business in the state and is issued a Certificate of Authority by the state's Department of Insurance. 7. The underwriting department of an insurance company is responsible for the selection of risks (persons and property) to insure and determines the rate to be charged for the amount of coverage to be issued. 8. Under the Direct Writing System, an agent/producer can be the employee of an insurance company that owns the agent's book of business. Under the Independent Agency, a producer is an independent agent that enters into selling agreements with more than one insurance company. They are appointed by more than one insurer. Independent agent retains ownership of their books of business. 9. The Law of Agency is a relationship where a Principal authorizes an Agent to act on its behalf in the business of insurance. An act of the agent is an act of the agent's principal. 10. Express authority is written into the producer's agency contract; implied authority is that which the public assumes the agent possesses; and apparent authority is created when the agent exceeds express authority and the insurer accepts the agent's actions. 11. The Fair Credit Reporting Act (FCRA) protects consumer privacy by ensuring that any data collected by an insurer remains confidential, and is accurate, relevant, and used for a proper and specific purpose. 12. A risk is the condition where the chance, probability or potential for a loss exists. 13. A peril is the cause or source of a loss. 14. A hazard increases the probability of a loss. The 3 types of hazards are physical, moral, and morale. 15. The principle of indemnity means that the insured should not profit from a loss. Instead, it restores the insured to the same financial or economic condition that existed prior to the loss. 16. Insurable interest in property and casualty insurance must exist at the time of the loss but for life insurance, it must exist only at the time of application and policy issuance. 17. The insurance contract is one of adhesion; one party (the insurer) prepares the contract and presents it to the second party (the insured), who must accept it on a "take-it-or-leave-it" basis. 18. The underwriting factors used to determine premium include age, gender, tobacco use, medical history, hazardous hobbies and hazardous occupations.

PRODUCER(Agent)

A person or agency appointed by an insurance company to represent it & to sell policies on its behalf. A producer acts with 1 or more of following 3 types of authority: Express - Authority that is written into producer's contract. An example would be producer's binding authority if written in contract. A producer's contract may also express what producer may not do, such as creating his/her own advertisements. Implied - Authority public assumes producer has. An example would be business activities of providing quotes, completing applications & accepting premiums on behalf of insurer. Apparent - Authority created when producer exceeds the authority expressed in agency contract. This occurs when the insurer takes no action to counter public impression that such authority exists. An example would be producer's issuance of a binder when, in fact, producer has not been granted such authority.

3 Types of Hazard- PHYSICAL

A physical condition that increases likelihood or probability of loss. Physical hazards may be seen, heard, felt, tasted, or smelled. Example: Flammable material stored near a furnace.

Types of Insurance Companies- Stock Insurance Company

A stock company is owned by stockholders or shareholders. Directors and officers, which are elected by stockholders, put in place a management team to carry out company's mission. Stockholders may receive taxable corporate dividends as a share of company's profit when & if declared by Directors. However, dividends are not guaranteed. Traditionally, stock insurers issue Non-Participating policies, meaning that policyholder is not entitled to receive any dividends.

Insurability

Ability of an applicant to meet an insurer's underwriting requirements.

INDEPENDENT AGENCY

An agent or agency that enters into selling agreements with more than one insurer. It may represent an unlimited number of insurers Agency retains ownership of business written An independent contractor that is paid a commission and covers cost of agency operations Career Agency System - Agents are recruited, trained & supervised by either a managing employee or General Agent who is contracted with insurance company.

3 Types of Hazard- MORALE

An attitude of indifference toward risk of loss that increases probability of a loss occurring. Example: Driving too fast for conditions, not wearing a seat belt, ignoring stop signs at familiar intersections, smoking, failure to take medications that could control a medical condition are all morale hazards.

Types of Risk- ADVERSE SELECTION

An imbalance created when risks that are more prone to losses than the average (standard) risk are 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 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 average risk exposures do.

Insurable Events

Any event, past or present, which may cause loss or damage, or create legal liability on the part of an insured.

Exclusive or Captive Agency System

Deals with insured through an exclusive or captive agent. Agent represents solely one company or group of companies having common ownership Insurer retains ownership rights to business written by agent agent is an employee or a commissioned independent contractor Insurer may or may not provide office & agency support services

Insurance Regulation at State Level

Insurance industry is regulated primarily at the state level. Legislative branch writes & passes state insurance laws, or statutes, to protect insuring public. Judicial branch is responsible for interpreting & determining constitutionality of statutes. Role of a state's executive branch is to enforce existing statutes that have been put in place. Commissioner, Director, or Superintendent of Insurance is typically appointed (or in some jurisdictions elected) by Governor, & Commissioner has power to issue rules & regulations to help enforce these statutes.

MASS MARKETING

Used to target a specific type of insurance to a large group of individuals, such as American Association of Retired People (AARP) Insurer may benefit by reductions in marketing costs & underwriting expenses may be lower when offering coverage to a limited population. Mass marketing uses direct response or direct mail method to reach its targeted audience. Associations may receive some financial benefit from allowing an insurer to market directly to its membership

Types of Insurance Companies- Fraternal Benefit Societies

are primarily social organizations that engage in charitable & benevolent activities that can provide life & health insurance to their members. Membership typically consists of members of a given faith, lodge, order, or society. They are usually organized on a non-profit basis, & fraternal insurance producers represent fraternal insurer & sell insurance to fraternal members.

Types of Risk- LOSS OF EXPOSURE

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

National Association of Insurance Commissioners (NAIC)

consists of all State & territorial insurance commissioners or regulators. It provides resources, research, legislative & regulatory recommendations & interpretations for state insurance regulators. It also promotes uniformity among states. Members may accept or reject recommendations. Has no legal authority to enact or enforce insurance laws.

SURPLUS ( EXCESS LINES) INSURANCE

finds coverage when insurance cannot be obtained from admitted insurers. However, it cannot be utilized solely to receive lower cost coverage than would be available from an admitted carrier. Each State regulates 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 Broker or Producer.

Types of Insurance Companies- Reciprocal Insurance Company

group-owned insurer whose main activity is risk sharing. Insurer is unincorporated, & is formed by individuals, firms, & business corporations that exchange insurance on one another. Each member is known as a subscriber, & each subscriber assumes a part of risk of all other subscribers. If premiums collected are insufficient to pay losses, an assessment of additional premium can be made. Exchange of insurance is affected through an Attorney-In-Fact, who is not required to be insurance licensed.

Types of Insurance Companies- Risk Retention Groups (RRG)

group-owned insurers that primarily assume & spread liability-related risks of its members. They are owned by their policyholders, & are licensed in @ least one state. However, they may insure members of group in other states. Groups must be made up of a large number of homogeneous or similar units. Membership is limited to risks with similar liability exposures such as theme parks, go-cart tracks, or water slides. They must have sufficient liquid assets to meet loss obligations. Each member assumes a portion of risks insured.

NON ADMITTED INSURER ( UN AUTHORIZED)

insurer has either applied for authorization to do business in this State and was declined or they have not applied. They do not have a Certificate of Authority to do business in the State.

ADMITTED INSURER ( AUTHORIZED)

insurer is authorized by this State's Commissioner of Insurance to do business in this State and has received a Certificate of Authority to do business in this State.

An Owner

is not necessarily insured under policy but is responsible for paying policy's premium & has various rights as specified in contract.

An Insured

person or entity that is covered by Insurer, which covers losses due to loss of life, health, property, or liability.

Four Elements of a Legal Contract

1. Competent Parties All parties to a contract (i.e., Insurer & Insured must have legal capacity to enter into a contract). Those w/out legal capacity include: Minors - insurer may be held responsible for its obligations. However, in most cases a minor cannot enter into a contract. Exceptions do exist, such as for purchase of auto insurance. Mentally incompetent or incapacitated Persons under influence of drugs or alcohol 2. Legal Purpose All parties to a contract must enter it for a legal purpose; public policy cannot be violated by a legal contract. All parties to a contract must enter it in good faith. 3. Agreement - One party must make & communicate an offer to other party and the second party must accept that offer. Without an offer, there is nothing to accept, & w/out acceptance of an offer, there can be no agreement. Offer, acceptance, or agreement can represent this element. Offer - made to enter into an insurance contract is most commonly an application, accompanied by an initial premium, and submitted by applicant. Acceptance - offer to provide an insurance contract takes place when insurance company agrees to issue insurance applied for, after receiving an initial premium & complete application. If applicant is insurable, but only under less favorable terms, insurer may make a counteroffer. In such cases, insured has been determined to be acceptable to insurance company but a policy will not be in force until applicant pays a higher premium &/or accepts any conditions imposed on coverage (such as reduced benefits). 4. Consideration Something of value is exchanged by each of parties to contract; exchange of money (1st premium only) for a promise (guarantees within contract). Consideration made by applicant is information on application & initial premium payment. If an application is not accompanied by initial premium, no offer has been made in technical sense, since consideration given is incomplete. If insurer still offers a policy based on application (notice the policy is now an offer), then acceptance is given when initial premium is paid. At that point, consideration is complete, and the policy is in force. Consideration provided by insurer is its promise to pay for covered losses -contract itself.

RISK

A condition where chance, likelihood, probability or potential for a loss exists.

A producer has each of following responsibilities to Insurer, except:

A duty to recommend only high premium policies Producer is responsible to insurance applicant to promptly forward premiums to insurer, recommend best protection, gain knowledge of applicant's insurance needs & current insurance coverage, & serve applicant's best interests.

Which of following is an insurance company that is organized under laws of another state within United States?

A foreign insurer is not organized under laws of state in which it is writing insurance, whereas a domestic insurer is organized under laws of state in which it is writing insurance.

Insurance Contract

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

Types of Insurance Companies- Mutual Insurance Company

A mutual company is owned by policyholders (who may be referred to as members). A Board of Trustees or Directors is elected by policyholders. directors and officers put in place a management team to carry out company's mission. Policyholders may receive non-taxable dividends as a return of any divisible surplus when & if declared by directors. Traditionally, mutual insurers issue Participating policies, meaning that policyholders are entitled to receive any dividends. Dividends represent favorable experience of company & result from excess investment earnings, favorable mortality, & expense savings. Dividends can be paid in cash, used to reduce premiums, left to accumulate at interest, & used to purchase paid-up additional insurance. Dividends are not guaranteed.

Domestic Insurer

An insurer organized under laws of this state, whether or not it is admitted to do business in this state. Example: An insurer incorporated in New York is considered domestic to New York

RE-INSURANCE COMPANIES

Companies are insurance companies that operate to accept all or a portion of the financial risk of loss from the primary (or "ceding") insurance company. Risk of loss is shared with one or more insurance companies. All contractual obligations are on original (primary) company & consumers have no direct contact with reinsurance companies.

Contracts General Terms

Contract Law Pertains to formation & enforcement of contracts. Tort Law Torts are civil wrongs; they're not crimes or breaches of contract. They result in injuries or harm that constitute the basis of a claim by a 3rd party. Hold Harmless Agreement A contractual agreement that transfers liability of one party to another party; it is used by landlords, contractors, & others as a way to avoid or reduce risk. Reasonable Expectations Doctrine What a reasonable & prudent policy owner would expect; reasonable expectations of policyowners are honored by Courts although strict terms of policy may not support these expectations.

Characteristics of an Insurance Contract

Contract of Adhesion - One party writes contract, w/out input from other party. One party (insurer) prepares contract and presents it to other party (applicant) on a "take-it-or-leave-it" basis, without negotiation. Any doubt or ambiguity found in document is construed in favor of party that did not write it (insured). Aleatory Contract - Exchange of value is unequal. Insured's premium payment is less than potential benefit to be received in the event of a loss. Insurer's payment in event of a loss may be much greater, or much less (e.g., $0 in event a loss doesn't occur), than insured's premium payment. Personal Contract - A contract between the insurance company & an individual. Personal contract are specific to person insured at time the contract is formed. Owner & insured cannot be changed w/out consent of insurance company. A property & casualty insurance contract is personal since it cannot be assigned. Life insurance is NOT a personal contract. Policy can be assigned - or a new owner may be named as long as insurer is notified of change. Unilateral Contract - Only one party is legally bound to contractual obligations after premium is paid to insurer. Only insurer makes a promise of future performance, & only insurer can be charged with breach of contract. Policyowner can cancel policy at any time & for any reason. Policyowner is not required to continue paying future premiums. Conditional Contract - Both parties must perform certain duties & follow rules of conduct to make contract enforceable. Insurer must pay claims if the insured has complied with all policy's terms & conditions. W/out premiums being paid on time & in full the insurer is not obligated to pay claim if the policy lapses.

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

Dishonesty refers to misrepresentation, untruthfulness, falsification. Breach of Trust is based on fiduciary relationship of parties & wrongful acts violating relationship. Penalties - Fines & possible prison time. As it pertains to insurance license applicants & producers: Applicants who have been convicted of a felony must apply for Consent to Work (1033 Waiver) in business of insurance - prior to applying for an insurance license. Producers must apply for consent in their resident state. Officers and employees must apply for consent in state where their home office is located. Prohibited persons (convicted felons) must apply for consent in order to discover if they are permitted or prohibited from insurance business. Reciprocity - If consent is granted by any state, other states must allow applicant to work in their states as well. Consent Withdrawal - If conditions of consent are not continually met, consent may be withdrawn.

PERSONAL PRODUCING AGENT

Does not recruit career agents. Sells insurance for carriers it is contracted with and maintains its own office and staff.

PRODUCERS RESPONSIBILITIES TO THE INSURER

Fiduciary duty to the insurer in all respects. A fiduciary is a legal or ethical relationship of trust between two or more parties. Typically, a fiduciary prudently takes care of money for another person especially when handling premiums for insurance policies or applications Must keep premiums in a trust account separate from other funds and forward to insurer promptly (no commingling) Must report any material facts that may affect underwriting Responsible for soliciting, negotiating, selling, and cancelling the insurance policies with the insurer Duty to only recommend the purchase of suitable policies

Which of the following type of authority does public assume an agent has when quoting insurance?

IMPLIED-Implied authority is that which public assumes agent has if it is not written into agent's agency contract.

Insurance Regulation at Federal Level

In the aftermath of Supreme Court decision in U.S. v. South-Eastern Underwriters (1944), McCarran-Ferguson Act of 1945 established that federal government will not regulate business of insurance in areas which states have historically had authority to do so (such as producer & company licensing) unless states fail to cooperate. Congress created federal agencies to provide regulatory oversight impacting insurance practices.

Principal of Indemnity

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

Risk Sharing Plan

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

INSURABLE RISK MUST INCLUDE

Large number of homogeneous units or groups with same perils. Law of Large #'s - As #'s of units in a group increases, more likely it is to predict a particular outcome. Auto insurance losses are easiest type of insurance loss to predict precisely because #'s of units insured is so great. chance of loss must be calculable. A statistical expectation of loss is used by insurers to calculate premiums. Loss must be measurable (definite & verifiable in terms of amount, cause, place & time). Premiums must be affordable. From perspective of insured, loss must be accidental in nature. Catastrophic perils are not covered; examples include war, nuclear hazard & illegal operations.

USA PATRIOT Act & Anti Money Laundering (AML)

Paying for an entire policy up front with cash Early cancellation of policy, regardless of cancellation fees (surrender charges) heavy use of 3rd parties for policy transactions Strong reliance on wire or electronic fund transfers to foreign accounts

Underwriting

Process of selecting classifying, & rating a risk for purpose of issuing or not issuing insurance coverage.

Legal Interpretations Affecting Contracts

Principal of Indemnity - Insured is restored to same financial or economic condition that existed prior to loss, depending on amount & type of insurance purchased. Insured should not profit from an insurance transaction. Utmost Good Faith - Both parties bargain in good faith when forming & entering into contract. two parties rely upon statements & promises of other & assume no attempt to conceal or deceive has been made. Representations - Statements made by applicant on application are considered representations & not warranties. Representations are statements that are believed to be true to best of the knowledge & belief of the applicant/insured at time of application. Material vs. Immaterial Representations - Statements that impact the acceptance of an insurable risk -whether involving rating of an acceptable risk, or decision as to whether to accept or decline a risk - are considered to be material. Immaterial representations do not affect acceptance or rating of risk. Misrepresentations - A false statement contained in application; usually does not void coverage or policy, if it is immaterial. If material to issuance of coverage, meaning insurer would not have issued a policy had misrepresentation not been made, or premiums charged would have been higher, or coverage limited, coverage does not apply. A material misrepresentation may void policy. Warranties - Statements in application or stipulations in policy that are guaranteed true in all respects. If warranties are later discovered untrue or breached (past, present or future), coverage (& sometimes contract) is voided. Concealment - willful holding back or secretion of material facts pertinent to issuance of insurance (or a claim). Concealment may result in denial of coverage & may void policy. Fraud - Intentional deception of truth in order to induce another to part with something of value or to surrender a legal right. Contains 5 elements: False statement, made intentionally & that pertains to a material fact Disregard for victim Victim believes false statement Victim makes a decision &/or acts based on belief in, or reliance upon, false statement victim's decision &/or action results in harm Waiver - Voluntary surrender of a known right, claim or privilege; An example would be an insurer's failure to obtain an answer to an unanswered question in its application for insurance prior to issuing the policy. Such a failure waives insurer's right to contest a claim based on information it could reasonably have obtained. It may also be in cases in which insurer accepts an overdue premium that keeps policy in-force. Estoppel - Judicial denial of a contractual right based on prior actions contrary to what contract requires. Example: An insurer who routinely does not require an application for reinstatement cannot contest a claim because an application was not submitted even though it is a requirement stated in reinstatement provision in its contracts. In law, there are several different forms of estoppel. If insurer waives its rights, it cannot later then assert those rights.

ADMITTED VS NON ADMINTED

Refers to whether or not an insurer is approved or authorized to write business in this State. The domicile does not impact whether an insurer may be admitted to do business in this State.

Types of Insurance Facultative Agreements

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

Types of Reinsurance Treaty- Agreements

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

LAW OF AGENCY

Relationship of a person (called agent or producer) who acts on behalf of another person, company, or government, known as principal. PRINCIPAL is responsible for acts of agent, & agent's acts bind principal. An act of an agent is act of principal.

A Joint Underwriting Association

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

MANAGING RISK

S Sharing Investments by 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 T Transfer Transferring risk from one party to another, such as from a consumer to an insurance company Transfer uncertainty of loss via a contract A Avoidance Elimination of the risk Avoid the activity that gives rise to 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 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 R Reduction Minimizing chance of loss, but not preventing risk. For example, sprinkler systems, burglar alarms, pollution controls & safety guards on machinery, taking medications, having preventive medical care. R Retention Assume responsibility for loss. Self-insure entire loss or a portion of loss. Choosing deductibles is a method of risk retention. It may be economically practical for an insured to not insure each exposure to loss &, instead insure only those risks that threaten financial stability or security.

SPECULATIVE RISK

Situations where there is a chance for loss, gain, or neither loss nor gain to occur. Examples of speculative risk include gambling, investing, starting a new business. Speculative risk cannot be insured.

INSURER ( PRINCIPAL)

Source of authority from which producer must abide. Insurer appoints producer to act on its behalf in transacting business of insurance. It is responsible for all acts of its producers when a producer is acting within scope of his/her authority. A producer may be personally liable when his/her actions exceed authority of his/her contract.

A warranty is defined as which of the following?

Statement in application that is guaranteed to be true, A warranty is a statement guaranteed true in all respects & if later discovered to be false, contract may be voided.

Fair Credit Reporting Act (15 USC 1681-1681d)

The Fair Credit Reporting Act protects consumer privacy & protects public from overly intrusive information collection practices. It ensures data collected is confidential, accurate, relevant & used for a proper & specific purpose. When an application is taken, it must inform applicant a credit report (from a consumer reporting agency) can be obtained. Purpose of this is to determine financial & moral status of an applicant (for variety of purposes such as employment screening, insurance underwriting or loan approvals). An applicant has right to review report. Applicant challenge - Credit reporting agency must reinvestigate within 6 months, if applicant challenges accuracy. Inaccuracies - Agency must forward to applicant inaccurate information given out within previous 2 years. Disallowed information - Report must not include lawsuits over 7 years old or bankruptcies more than 10 years old. Disclosure upon request - Consumer reporting agencies must provide information on file if requested. Limited access to information - A consumer reporting agency may not provide a credit report to any party that lacks a permissible purpose, such as evaluation of an application for a loan, credit, service, or employment. Permissible purposes also include several business & legal uses. Investigation of disputed information - If a consumer's file contains inaccurate information, agency must promptly investigate the matter with source that provided the information. If investigation fails to resolve dispute, a statement may be added to credit file explaining matter. Correct or delete inaccurate information - A consumer reporting agency must correct or, if necessary, delete from a credit file information that is found to be inaccurate or can no longer be verified. 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 file.

Which insurance company department accepts insurance risk?

UNDERWRITING-is responsible for evaluating the acceptability of a risk &, once accepted, determines actual rate to be charged.

Indemnity

Which principle of insurance restores the insured to same economic condition that existed before loss?

RESIDUAL MARKETS

are a last resort private coverage source for businesses and individuals who have been rejected by voluntary insurance market. Coverage is typically written as workers' compensation, personal auto liability, or property insurance on real property.

Insurance Agencies

are captive or independent organizations that recruit, contract with, train, & support insurance producers.

Types of Insurance Companies- Lloyd's of London

is not an insurance company, but consists of groups of underwriters called Syndicates, each of which specializes in insuring a particular type of risk. Provides a meeting place & clerical services for syndicate members who actually transact business of insurance. Members are individually liable for each risk they assume, & coverage provided is underwritten by a syndicate manager such as an attorney-in-fact or individual proprietor.

Insurance companies (known as Insurers or Carriers)

they manufacture & sell insurance coverage in form of insurance policies or contracts of insurance.

Federal Insurance Office (FIO)

was established by Dodd-Frank Wall Street Reform & Consumer Protection Act. This office monitors insurance industry & identifies issues & gaps in state regulation of insurers. It also monitors access to affordable insurance by traditionally underserved communities & consumers, minorities, & low- & moderate-income persons. Is not a regulator or supervisor. Insurance is primarily regulated by individual States. Insurance producer & company trade associations also exist to provide education, support, networking & lobbying for insurance companies & producers.

Dishonest tendencies that increase probability of loss are what types of hazard?

A hazard increases chance of loss & 3 types are moral, morale, which is indifference or carelessness, & physical, which is a physical condition.

BROKER

A licensed individual who negotiates insurance contracts with insurers on behalf of applicant. A broker represents applicant or insured's interests, not insurer, & does not have legal authority to bind insurer. Broker licenses are not applicable in all states.

TYPES OF RISK

Loss - Reduction, decrease, or disappearance of value. A loss is basis of a claim under the terms of an insurance policy. Peril - cause or source of a loss (fire, windstorm, embezzlement, disease, death). Hazard - A specific condition that increases probability, likelihood, or severity of a loss from a peril.

A ______________ insurance company is owned by its policyholders

MUTUAL

Each of following is a factor considered by an underwriter, except:

Marital Status is not an underwriting factor, but nature of risk is also considered.

Fraud & False Statements (Fraudulent Insurance Act)

A fine of no more than $50,000, imprisonment for up to 10 years, or both If violation jeopardized safety & soundness of an insurer & was a significant cause of insurer being placed in conservation, rehabilitation, or liquidation by an appropriate court, imprisonment can be for up to 15 years If the amount embezzled or misappropriated does not exceed $5,000, violators will be fined up to $50,000 or imprisoned for up to 1 year, or both If a person uses threats, force or attempts to impede/obstruct administration of law during any proceeding involving business of insurance before any insurance regulatory official, he/she will be fined up to $50,000 or imprisoned up to 10 years, or both. Any individual who has been convicted of a felony involving dishonesty or a breach of trust, who then willfully engages or permits an individual to engage in the business of insurance, & whose activities affect interstate commerce, will be fined up to $50,000 or imprisoned up to 5 years, or both.

MANAGEMENT

Determination of what types of protection are required to meet an insured's needs. Risk may be manageable, but it cannot be eliminated A survey of insured's operations, health, & risk exposures that could give rise to losses, including identification of hazardous conditions or situations that could be reduced or eliminated to prevent losses Assessment of potential loss frequency & severity Physical inspections, applications or medical exams used in underwriting may help to manage or raise awareness of a risk Health insurance providers may offer insureds "wellness" programs at low or no cost for weight loss, smoking reduction, stress, or medical conditions such as diabetes as a means of reducing company's future claims exposure

3 Types of Hazard- MORAL

Dishonest tendencies that increase probability of a loss; certain characteristics & behaviors of people. Moral hazards most closely related to some form of lying, cheating, or stealing. Example: An insured burns down his/her own house to collect insurance payout.

Insurer Management & Distribution

Executives - Oversee operation of business. • Actuarial Department - Gather & interpret statistical information used in rate making. An actuary determines probability of loss & sets premium rates. • Underwriting Department - Responsible for selection of risks (persons or property) to insure & rating that determines policy premiums. • Marketing/Sales Department - Responsible for advertising & selling. • Claims Department - Assists policyholder, insured, or beneficiary in event of a loss & processes, & pays amount of claim in a timely manner based upon contractual provisions & amount insured.

Producers Responsibilities to Insurance Applicant or Insured

Forward premiums to insurer on a timely basis Seek & gain knowledge of applicant's insurance needs Review & evaluate applicant's current insurance coverage, limits, & risks Serve best interests of applicant or insured, although producers represent insurer Recommend coverage that best protects insured from possible loss & NOT most profitable coverage from perspective of producer Life & health producers do not issues contracts or binders for life or disability insurance, & should not imply that coverage is in effect simply because a person submits an application & payment for 1st premium

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

Information collected about consumer Where that information is shared How that information is used How that information is protected notice must also identify consumer's right to opt out of information being shared with unaffiliated parties pursuant to provisions of Fair Credit Reporting Act.

Insurance Contract General Terms

Indemnity Contract Pays a specified dollar amount as stated in contract up to amount of actual loss. These contracts are considered reimbursement plans Parol Evidence Rule A written contract may not be altered w/out written consent of both parties. Valued contract A contract that pays a specified amount regardless of actual loss. A life insurance contract is an example of a valued contract. It has a face value that provides a death benefit in event of a loss. Subrogation Occurs when a claim is paid by insurer who has contract & right to take legal action against a negligent 3rd party who may have caused loss. Life policies have no right of subrogation.

FINANCIAL SERVICES AGENCIES

Independent financial rating services evaluate & rate claims paying ability & financial stability of insurance companies. These firms assign letter ratings that indicate financial strength of each company which may be based on both public & nonpublic data. higher rating opinion is that insurer has a higher likelihood of ability to pay claims. Lower rating opinion is that insurer is less likely of being able to pay claims. Ratings are made available to public, though insurers may purchase reprints of their ratings for use as marketing tools. Producers are responsible for placing business with insurers that are financially sound. Examples of rating services include: A.M. Best Company, Standard &Poor's, Moody's Investment Services, Weiss Insurance Rating, & Fitch Ratings.

Insurable Interests

Insurable Interest All Policies Insurable interest must exist in every enforceable insurance contract. Requires potential for an insured to suffer financial or economic hardship in event of a loss, as well as a valid legal purpose for contract. Life & Health policies Insurable interest must exist at time of application, but not at time of loss. Coverage is determined based on possibility of an economic or financial loss due to an accident, sickness, or death of insured. Amount of insurance that may be purchased varies based on the type of coverage. Each person has an unlimited insurable interest in his/her own life, but this does not prevent an insurance company from limiting amount of life insurance it makes available to any person. Insurer does not want to over insure as this may increase likelihood of a claim. Property While it is unlikely an insurer will issue a policy if there is no insurable interest at time of application, insurable interest must specifically exist at time of loss. Property ownership (or mortgage or lien) is evidence of insurable interest. Casualty Insurable interest must exist at time of loss. Insurable interest usually results from property or contract rights & potential legal liability.

Direct Mail or Direct Response Company

Insurers who sell insurance policies directly to the public with licensed employees or contractors A marketing system utilizing mass media, such as direct mail, newspapers, magazines, radio, television, internet, web sites, call centers and vending machines

Each of following must be included in an insurable risk, except:

Large group with dissimilar members: An insurable risk must also include a large # of groups with same perils, affordable premiums, & loss must be measurable.

Private vs. Government Insurers

Most insurance is written through private insurers. However, there are instances where governmental-based insurers step in to offer an insurance alternative when private insurers are unable to provide protection, usually related to catastrophic nature of the risk, capacity to handle risk, & lack of desire to engage in a line of insurance where experience to evaluate necessary premium intake to offset potential loss is lacking.

DIRECT WRITING SYSTEM

Producer or Agent is an employee of insurer Insurer owns accounts agent may be paid a salary, salary+bonus, or commission

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?

REINSURANCE

Types of Insurance Companies- Self-Insurers

Self-insurers assume all of financial risk faced without transferring that risk to an insurer. Rather than paying premiums to a 3rd party self-insurer sets aside funds in an amount equal to or greater than expected losses. If losses are less than what is reserved to pay claims, it is a gain, otherwise, losses in excess of the reserve will require additional funding perhaps from on-going operation revenues. This is generally an option only for large companies who may limit their risk by only self-insuring up to a certain dollar amount of risk and then acquiring insurance for dollar amounts in excess of that amount.

PURE RISK

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

Insurer Underwriting

Underwriter Underwriter's primary responsibilities include selection of risks by determining insurability. Insurable interest is also established at that time. Underwriter also determines classification, or type of risk, & premium rating if a risk is accepted by insurer. Underwriting protects insurer against adverse selection and risks that are more likely than average to suffer losses. Goal is to select risks that fall into normal range of expected losses. Field underwriter is producer. Underwriting Factors Age Gender Tobacco use Medical history and preexisting conditions Hazardous hobbies and occupations Premium Assumptions An adequate premium must be charged for risk based on same factors used in evaluating risk. Premium rates are considered inadequate when they do not cover projected losses & expenses. Rates must not be excessive or unfairly discriminatory. Rate - The dollar amount charged for a particular unit of insurance, such as $5 per $1,000 of insurance. Premium - total cost for amount of insurance purchased. $50,000 of coverage = $5 rate x 50 (per $1,000 of insurance) for a $250 premium.