General Insurance Chapter 1

Direct Writing System

- Producer or Agent is an employee of the insurer. - Insurer owns the accounts - Agent may be paid salary, salary plus bonus, or commission.

Each of the following is an element of a legal contract, except:

A Agreement B Indemnity C Consideration D Legal Purpose

Void contract

An agreement without legal effect because it was made illegally or it was declared void by the courts because it doesn't contain all the elements of a legal contract.

Reinsurance Companies

An insurance company that assumes all or a portion of a risk from a primary or ceding insurance company. Reinsurance transfers risk among insurance companies.

Foreign Insurer

An insurer not organized under the laws of this state, but in one of the other states or jurisdictions within the United States, whether or not it is admitted to do business in the state or jurisdiction.

Peril

Hail Lightning Fire Theft

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

Indemnity

Financial Rating Services

Independent financial rating services evaluate and rate the financial stability of insurance companies. These companies assign rating codes to show financial strength or weakness of each company rated.

Contract Law

Pertains to the formation and enforcement of contracts.

Estoppel

Prevents the denial of a fact, if the fact was admitted to be true previously.

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

Producer

Marketing/Sales Department

Responsible for advertising and selling.

Direct Mail or Direct Response Company

Sells insurance policies directly to the public with licensed employees or contractors. A marketing system utilizing direct mail, newspapers, magazines, radio, television, internet, web sites, call centers and vending machines.

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

The Act made it a felony for a person to engage in the business of insurance after being convicted of a state or federal felony crime involving dishonesty or breach of trust. Violations include willfully embezzling money, knowingly making false entries in any book, report or statement of the business, threatening or impeding proper administration of the law in any proceeding involving the business of insurance.

Rate

The dollar amount charged for a particular unit of insurance, such as $5 per $1,000 of insurance

Manual Rating

The use of rates contained in a manual published by the insurer or those of the rating organization of which it is a member.

Retrospective rating

The use of rates that adjust the policy premium to reflect the current loss experience of the policyholder. Premium adjustments are subject to minimums and maximums.

Merit Rating

The use of rates that rewards a policyholder that takes measures to decrease the probability of loss by the implementation of safety programs, loss control programs, etc.

Which insurance company department selects the risks that the insurance company will insure?

Underwriting

Waiver

Voluntary surrender of a known right, claim or privilege.

Reasonable Expectations Doctrine

What a reasonable and prudent policy owner would expect; the reasonable expectations of policyowners are honored by the Courts although the strict terms of the policy may not support these expectations.

Law of Agency

defines the relationship between two or more parties where one party, the agent/producer, acts on behalf of the other party, known as the principal or insurer. The agent/producer binds the actions and words of the principal.

Surplus (Excess) Lines Insurance

finds coverage when the kind or amount of insurance cannot be obtained from admitted insurers. It may not be utilized solely to receive lower cost coverage than would be available from an admitted carrier.

Fraud

intentional deception resulting in injury to another person

Mass Marketing

used to target a specific type of insurance to a large group of individuals, such as the American Association of Retired People (AARP). Insurer reduces marketing and underwriting expenses.

Four Elements of a Legal Contract

1. Competent Parties: All parties to a contract. Insurer and Insured must have legal capacity to enter into a contract. 2. Legal Purpose: All parties to a contract must enter it for a legal purpose; public policy cannot be violated by a legal contract. 3. Agreement: One party must make and communicate an offer to the other party and the second party must accept that offer. 4. Consideration: Something of value is exchanged; the exchange of an act for a promise. The consideration made by the applicant is the premium payment. The consideration made by the insurer is its promise to pay for covered losses.

Speculative Risk

A chance of loss, no loss, or gain.

Valued Contract

A contract that pays a stated amount in the event of a loss (most insurance policies are NOT valued contracts unless they are endorsed).

Hold Harmless Agreement

A contractual agreement that transfers the liability of one party to another party; it is used by landlords, contractors, and others as a way to avoid or reduce risk.

Misrepresentations

A false statement contained in the application; usually does not void coverage or the policy. If material to the issuance of coverage, meaning the insurer would not have issued coverage had the misrepresentation not been made, coverage does not apply. In some cases, a material misrepresentation may void the policy.

If a person engaged in the business of insurance whose activities affect interstate commerce willfully embezzles, misappropriates funds/property, knowingly and with the intent to deceive makes a false material statement or purposely overstates the security of an insurer, the following penalties apply:

A fine of no more than $50,000, imprisonment for up to 10 years, or both If the violation jeopardized the safety and soundness of an insurer and was a significant cause of the 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

The Insurance Contract

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. A contract designed to transfer risk from the insured to the insurer.

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 thus does not have legal authority to bind the insurer. A broker's license is not applicable in all states.

Tabular method

A loss reserve based upon the estimated length of an insured's or claimant's life or expected disability.

Average value method

A loss reserve established based on average settlements of particular claim types.

Case reserve method

A loss reserve established for each claim, when reported.

Loss ratio method

A loss reserve formula based upon the expected losses for a particular class or line.

Schedule rating

A method of rating property and liability risks by using charges and credits to modify a class rate based on the nature of the particular risk being rated.

Residual Markets

A private coverage source of last resort for businesses and individuals who have been rejected by voluntary market insurers.

Powers of Authority

A producer acting as an agent for an insurer has a contract stating the parameters of their authority to represent the insurer. A producer's actions fall under one of the following types of authority: Express, Implied, Apparent

Experience rating

A rate based on the policyholder's actual loss history when compared to the loss history of similar risks.

Class rating

A rate charged to a group of policyholders who have similar exposures and experience.

Individual rating

A rate used for a policyholder because a large enough pool of similar risks is not available to any other type of rate. Primarily used for commercial and specialty risks because of the number of unique variables involved.

Loss Cost rating

A rating organization provides insurers with the portion of a rate that does not include provisions for insurer expenses and profits (which insurer adds to arrive at final rate)

Pure Risk

A situation in which there are only the possibilities of loss or no loss

Open competition

A state relies on competition between insurers to produce fair and adequate rates

Parol Evidence Rule

A written contract may not be altered without the written consent of both parties.

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.

Insurable Interest:

All PoliciesInsurable interest must exist in every enforceable insurance contract. Depending upon the contract, it must exist at the time of application or at the time of loss.Requires the potential for an insured to suffer financial or economic hardship in the event of a loss. Life & Health PoliciesInsurable interest must exist at the time of application, but not at the time of loss.Coverage is determined based on the possibility of an economic or financial loss due to an accident, sickness, or death of the insured.The amount of insurance that may be purchased varies based on the type of coverage. In some cases, no coverage limit apply. PropertyInsurable interest must exist at the time of the loss.Property ownership (or mortgage or lien) is evidence of insurable interest. CasualtyInsurable interest must exist at the time of the loss.Insurable interest usually results from property or contract rights and potential legal liability.

Independent Agency

An agent or agency that enters into agency agreements with more than one insurer. It may represent an unlimited number of insurers. Agency retains ownership of the business written. An independent contractor that is paid a commission and covers the cost of agency operations.

Indemnity Contract

An agreement to pay on behalf of another party under specified circumstances, such as when a loss occurs.

Adverse Selection

An imbalance created when risks that are 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. High-risk exposures tend to seek or continue insurance at a higher participation rate than the average risk exposures do.

"A' Rating or judgement rating

An individual rate that doesn't use loss history as a component and that is derived largely from the underwriter's evaluation and best judgement the risk poses 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.

Domestic Insurer

An insurer organized under the laws of this state, whether or not it is admitted to do business in this state.

Insurable Events

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

Which of the following types of authority does the public assume an agent has, based on the agent's conduct?

Apparent

Insurance license applicants and producers:

Applicants who have been convicted of a felony must apply for Consent to Work in the 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 the 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 the insurance business Reciprocity - If consent is granted by any state, other states must allow the applicant to work in their states as well Consent Withdrawal - If conditions of consent are not continually met, the consent may be withdrawn

Hazard

Arson Smoking Icy parking lot Bungee jumping

Claims Department

Assists the policyholder in the event of a loss.

Merchant Marine Act of 1920 (the Jones Act)

Because workers' compensation laws do not apply to seamen, the Jones Act allows insured seamen to make claims for injuries suffered during the course of employment. It also regulates maritime commerce in U.S. waters, transportation of cargo, and the rights of seamen.

Contract of Utmost Good Faith

Both parties bargain in good faith when forming and entering into the contract. The two parties rely upon the statements and promises of the other and assume no attempt to conceal or deceive has been made.

Conditional Contract

Both parties must perform certain duties and follow rules of conduct to make the contract enforceable. The insurer must pay claims if the insured has complied with all the policy's terms and conditions.

Applicant Challenge

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

Exclusive or Captive Agency System

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

Motor Carrier Regulatory and Modernization Act (the Motor Carrier Act of 1980)

Deregulated the trucking industry by prohibiting any entity from interfering with a motor carrier's right to set its own rates. Motor carriers and private motor carriers that transport property are required to establish evidence of financial responsibility in the form of insurance, a bond, a guarantee, or qualification as a self-insurer.

Expense ratio

Determined by dividing an insurer's Total Operating Expenses by Written Premiums

Loss ratio

Determined by dividing the sum of Paid Losses + Loss Reserves by Total Earned Premiums.

Personal Producing General Agent

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

Domicile

Domicile refers to the jurisdiction (i.e., state or country) where an insurer is formed or incorporated. There are three types of Insurer domiciles: Domestic insurer, foreign insurer, alien insurer

Which federal regulation protects consumer privacy?

Fair Credit Reporting Act

Producer's Responsibilities to the Insurer:

Fiduciary duty to the insurer in all respects, especially when handling premium funds Must keep premium funds in a trust account separate from other funds and forward to insurer promptly 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

An insurance company that is organized under the laws of a different state within the United States is known as a:

Foreign insurer

Producer's Responsibilities to insurance Applicant or Insured:

Forward premiums to insurer on a timely basis Seek and gain knowledge of the applicant's insurance needs Review and evaluate the applicant's current insurance coverage, limits and risks Serve the best interests of the applicant or insured, although producers represent the insurer Recommend coverage that best protects the insured from possible loss and NOT the most profitable coverage from the perspective of the producer

Fraud and False Statements (Fraudulent Insurance Act)

Fraud always involves a 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.

Terrorism Risk Insurance Act

Funds coverage for potentially catastrophic events due to acts of terrorism. Applies to all property insurance

Actuarial Department

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

Principle of Indemnity

Insured is restored to the same financial or economic condition that existed prior to the loss. Insured should not profit from an insurance transaction.

Risk Sharing Plan

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

Prior approval

Insurers cannot use rates until approved by the Department of Insurance, or until a specific time period has expired after the filing.

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

Large group with different risks

Insurable risks must include:

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

Lloyds of London

Lloyds 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. Lloyds provides a meeting place and clerical services for syndicate members who actually transact the 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.

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

Marital status

Dishonest tendencies that increase the probability of loss is which of the following types of hazard?

Moral

A ______________ insurance company is owned by its policyholders.

Mutual

Contract of Adhesion

One party writes the contract, without input from the other party; one party (insurer) prepares the contract and presents it to the other party (applicant) on a "take-it-or-leave-it" basis, without negotiation. Any doubt or ambiguity found in the document is construed in favor of the party that did not write it (insured).

Unilateral Contract

Only one party is legally bound to the contractual obligations after the premium is paid to the insurer. Only the insurer makes a promise of future performance, and only the insurer can be charged with breach of contract.

Executives

Oversee the operation of the business

Which of the following calculations equals a company's loss ratio?

Paid losses + loss reserves ÷ total earned premium

Three Types of Hazard

Physical Hazard - A physical condition that increases the probability of loss; use, condition, or occupancy of property. Example: Flammable material stored near a furnace. 2. Moral Hazard - Dishonest tendencies that increase the probability of a loss; certain characteristics and behaviors of people. Example: An insured burns down his/her own house to collect the insurance payout. 3. Morale Hazard - Attitude that increases the probability of a loss. Example: Indifference or carelessness of leaving one's house or vehicle unlocked.

File and use

Rates must be filed with the state insurance regulatory authority (Department of Insurance) and may be used as soon as they are filed.

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

Disallowed Information

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

Underwriting Department

Responsible for the selection of risks (persons and property to insure) and rating that determines actual policy premium.

Risk Retention Groups (RRGs)

Risk Retention Groups are group-owned insurers that primarily assume and spread the liability related risks of their members. RRGs are owned by their policyholders and licensed in at least one state. However, they may insure members of the group in other states.

Managing Risk Managing risk is the practice of analyzing exposures that create risk and designing programs to minimize the possibility of a loss. The ways of managing risk are:

Sharing Investments of a large number of people may be pooled by use of a corporation or partnership 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 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 Reduction Minimizing the chance of loss, but not preventing the risk. For example, sprinkler systems, burglar alarms, pollution controls and safety guards on machinery. Pooling or spreading the risk among a large number of persons or entities 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 might be economically practical for an insured to not insure each exposure to loss, and instead insure only those risks that threaten financial stability security

Mandatory rates

Some states require that mandatory rates be used for certain lines of insurance.

A warranty is defined as which of the following?

Statement in the application that is guaranteed to be true

Warranties

Statements in the application or stipulations in the policy that are guaranteed true in all respects.

Representations

Statements made by the applicant on the insurance application that are believed to be true, but are not guaranteed to be true.

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

The Fair Credit Reporting Act protects consumer privacy and protects the public from overly intrusive information collection practices. It ensures data collected is confidential, accurate, relevant and used for a proper and specific purpose. When an application is taken, it must inform the applicant a credit report (from a consumer reporting agency) can be obtained. The purpose of this is to determine the financial and moral status of an applicant (for variety of purposes such as employment screening, insurance underwriting or loan approvals). An applicant has the right to review the 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 the 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 the evaluation of an application for a loan, credit, service, or employment. Permissible purposes also include several business and legal uses. Investigation of disputed 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. 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.

Insurability

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

Loss Exposure

The condition of being at risk for a loss. Purely by existing, property and people are at risk for loss.

Aleatory

The exchange of value is unequal. Insured's premium payment is less than the potential benefit to be received in the event of a loss. The insurer's payment in the event of a loss may be much greater, or much less (e.g., $0 in the event a loss doesn't occur), than the insured's premium payment.

Insurer (Principal)

The insurer is the source of authority from which the producer must abide. The insurer is responsible for all acts of a producer when the producer is acting within the scope of its authority. The producer may be personally liable when their actions exceed the authority of the agency's contract.

Loss Reserves

The net premiums plus interest reflects possible future contract obligations. An accounting measurement of an insurer's future obligation to its policyholders.

Premium

The total cost for the amount of insurance purchased

Concealment

The willful holding back or secretion of material facts pertinent to the issuance of insurance (or a claim), even if the applicant or insured was not about the subject. Concealment results in denial of coverage and may void the policy.

Gramm-Leach-Bliley Act (GLBA, a.k.a. the Financial Services Modernization Act of 1999)

This act 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. The Financial Privacy rule requires "financial institutions," which include insurers, to provide each consumer with a privacy notice at the time the consumer relationship is established and annually thereafter. 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

The Federal Insurance Office (FIO)

This office monitors the insurance industry and identifies issues and gaps in the state regulation of insurers. It also monitors access to affordable insurance by traditionally underserved communities and consumers, minorities, and low- and moderate-income persons. The FIO is not a regulator or supervisor. Insurance is primarily regulated by the individual States.

Self-Insurer

To self-insure means to assume the financial risk one's self. This is generally an option only for large companies who may even reinsure for risks above certain maximum limits.

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 third party.

Types of Reinsurance:

Treaty Agreements - Reinsurance agreement that covers all risks contained in the subject line(s) of business automatically. Facultative Agreements - Reinsurance agreement that allows ceding and reinsurance companies the opportunity to negotiate coverage for individual risks.

Fraternal Benefits Society

Usually organized on a non-profit basis, fraternal benefit societies are primarily social organizations that engage in charitable and benevolent activities that provide life and health insurance to their members. Membership typically consists of members of a given faith, lodge, order, or society.

Voidable contract

a valid that for reasons satisfactory to a court, may be set aside by one of the parties. An example is an insurer may void or revoke coverage for misrepresentation or fraud.

Admitted (Authorized) insurer

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.

The National Association of Insurance Commissioners (NAIC)

consists of all State and territorial insurance commissioners or regulators. The NAIC provides resources, research, legislative and regulatory recommendations and interpretations for state insurance regulators.

Apparent authority

created when the producer exceeds the authority expressed in the agency contract. It is authority the public (or a third-party) is falsely led to believe the agent has and the principal does nothing to counter the public impression that such authority exists.

Reciprocal Insurance Company

group-owned insurer whose main activity is risk sharing. They are unincorporated, and formed by individuals, firms, and business corporations that exchange insurance on one another. Each member is known as a subscriber. Each subscriber assumes a part of the risk of all other subscribers. If premiums collected are insufficient to pay losses, an assessment of additional premium can be made.

Non-admitted (Unauthorized) 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.

Financial Anti-Terrorism Act (The USA Patriot Act)

imposes record keeping and government reporting requirements on banks, financial institutions and non-financial businesses for specific financial transactions and customer financial records (a part of the Bank Secrecy Act).

Implied authority

is not specifically stated in the contract, but is necessary, reasonable, and usual for the producer to perform stated duties. Since not all duties can be spelled out in the contract, incidental duties are assumed by the agent as appropriate to carry out the express authority granted by the principal.

A Joint Underwriting Association or Joint Reinsurance Pool

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

Combined ratio

the sum of the loss ratio and the expense ratio.

Express authority

written into the producer's agency contract. It details specific activity regarding the producer's ability to transact business on behalf of the principal. An example would be the producer's authority to solicit, negotiate, and sell insurance contracts on behalf of the principal. The agent may also have the express authority to bind coverage.