Unit 2- The Insurance Industry
Social security Hospital Insurance (HI)
(Part A of Medicare)
Supplemental Medical Insurance (SMI)
(Part B of Medicare)
Reciprocal insurers
-An unincorporated association (exchange) with each member insuring the other insureds within the association. -The association is not "owned" but run by an attorney-in-fact appointed by the members. -Each member is both an insurer and an insured -An attorney-in-fact is one given specific authority to act for another in certain clearly defined matters.
Independent Agency System
-Creation of the property and casualty industry, does not tie a sales staff or agency to any one particular insurance company. -Independent agents represent any number of insurance companies through contractual agreements. -Paid commission or fee basis for the business produced.
In Florida, insurance regulation includes
-Issuing rules and regulations. -Licensing and supervising insurance companies formed within the state. -Licensing, appointing, and supervising agents and brokers. -Regulating the investment activities of insurers. -Controlling the kinds of insurance contracts and policies that may be sold in the state. -Determining the amount of reserves an insurer must maintain. -Overseeing insurance companies marketing practices and investigating all consumer complaints.
Fraternal benefit societies
-Non-profit entities that sell insurance only to its members. -Members are issued insurance certificates and annuities with many of the same provisions found in commercial insurance companies' policies. -Operates as a corporation, society, or association to provide life insurance primarily for its members and beneficiaries' mutual benefit. -It has a lodge or social system with certain rituals and a representative form of government. -Noted for their social, charitable, and benevolent activities.
Mutual insurers
-Owned by policyholders. -The policyholders choose the officers of the company. -Do not have permanent capital stock. -The operating objective: provide insurance to its owners (policyowners) at the lowest possible net cost. -Commonly referred to as participating companies
Stock insurer
-Private organization that is organized and incorporated under state laws for the primary purpose of earning a profit for its stakeholders. -Owned and controlled by the stockholder who provides the financial support (capital) necessary to operate the company. The stockholders elect the officers of a stock company. -Referred to as a nonparticipating company
Self-Insurers
-Self-insurance is not a method of transferring risk; thus, it retains the risk. -Self-insurer establishes its own reserves to cover potential losses. Commonly, self-insurers will also look to add private insurance to cover losses that exceed the amount they wish to self-insurer. Three areas that are commonly self-insured are (1) pension plans, (2) medical insurance, and (3) sick leave. Self- insures plans are typically administered by Administrative-Service Only (ASO) or Third-Party Administrator (TPA) organizations, which handle paperwork and process claims. ASOs and TPAs are paid a fee for their services.
Service providers
-These providers offer benefits to subscribers in return for the payment of a premium. -Benefits are in the form of services provided by the hospitals and physicians participating in the plan. -They sell medical and hospital care services, not insurance. -These services are packaged into various plans, and those who purchase these plans are known as subscribers.
Career Agency System
-branches of major stock and mutual insurance companies that are contracted to represent the particular insurer in a specific area. -Agents are recruited, trained, and supervised by manager or a General Agent (GA). -The career Agency system focuses on building sales staffs.
Personal Producing General Agency System (PPGA)
-do NOT recruit, train, or supervise career agents. -PPGAs are responsible for maintaining their own offices and staff. They primarily sell insurance. -Agents hired by a PPGA are considered employees of the PPGA, not the insurance company. -Supervised by regional directors.
Lloyd's of London (Lloyd's)
-not an insurance company but rather an organization or association of individuals and companies that individually underwrite insurance. -Lloyd's function is to gather and disseminate underwriting information, help its associates settle claims and disputes, and, through its member underwriters, provide coverage that might otherwise be unavailable in certain areas. Lloyd's is known to find coverage for unusual risks. For example: model or ballerina insuring each of their legs for $5M each.
Domestic Company
A name given to an insurance company in the state of its incorporation, as a Florida insurance company is domestic (domicile) in the State of Florida, foreign as to all other states, and alien as to all other countries.
State Guaranty Associations
All states have established guaranty funds or guaranty associations to support insurers and to protect consumers if an insurer becomes insolvent. Suppose an insurance company is insolvent or becomes financially unable to pay its claims. In that case, a fund, maintained through assessments by all voluntary companies in the state, provides coverage (up to specified amounts) to cover the consumers' unpaid claims.
Risk-retention groups (RRG).
An RRG is a mutual insurance company formed to insure people in the same occupation, business, or profession. For example: pharmacists, doctors, realtors, etc.
Foreign Company
An insurance company formed under the laws of the United States but operates in a state other than the one in which it has been incorporated.
Alien Company
An insurance company organized under the laws of a foreign country
Licensed
Authorized, admitted
Worker's Compensation
Benefits paid to workers for injury, disability, or disease contracted in the course of their employment.
3 systems that support the sale of insurance through agents and brokers
Career agency System Personal producing general agency system Independent agency system
Multi-line insurers
Companies that write more then 1 line of insurance.
USA PATRIOT Act of 2001
Congress passed the USA PATRIOT ACT (Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism) to provide the federal government broad powers to curtail attempts to launder money and finance terrorism. As part of this act, insurers and other financial institutions must: (1) develop new compliance systems and training (2) designate anti-money laundering officers (3) share information with other financial institutions and enforcement entities (4) adopt robust procedures to verify the identity of any person opening an account.
Other Methods of selling Insurance
Direct selling Mass Marketing
Intervention by the FTC 1958
Federal trade commission(FTC) sought to control the advertising and sales literature used by health insurance industry.
Medicaid
Florida Agency for Health Care Administration
Health maintenance organization (HMO)
HMOs known for stressing preventive health care and early treatment programs, offer a wide range of health care services to member subscribers. For a fixed periodic premium paid in advance of any treatment, subscribers are entitled to services of hospitals and physicians that are contracted to work with the HMO.
2 main types of service providers
Health maintenance organization (HMO) Preferred provider organization (PPO).
In FLORIDA the law specifies that no life or health insurance policy may be issued for delivery unless the application is taken by, and the policy delivered through, a licensed agent who will receive the usual commission.
In FLORIDA the law specifies that no life or health insurance policy may be issued for delivery unless the application is taken by, and the policy delivered through, a licensed agent who will receive the usual commission.
In Florida, an agent's license is perpetual unless suspended or revoked. Agents must complete at a minimum of 24 hours of approved continuing education every 24 months. Agents who have been licensed for six (6) or more years must complete 20 hours biennially. An agent's license will terminate if the agent allows 48 months to elapse without being appointed for each insurance authority listed on their license.
In Florida, an agent's license is perpetual unless suspended or revoked. Agents must complete at a minimum of 24 hours of approved continuing education every 24 months. Agents who have been licensed for six (6) or more years must complete 20 hours biennially. An agent's license will terminate if the agent allows 48 months to elapse without being appointed for each insurance authority listed on their license.
Nonparticipating
Insurance under which the insured is not entitled to share in the divisible surplus of the company.
McCarran-Ferguson Act 1945 / Public Law 15 (PL15)
Maintained that the states should regulate insurance. Made possible the application of federal anti-trust laws where the business was not regulated by state law. Each state revised its insurance laws to conform to the federal law.
Minimum Premium Plan (MPP)
May obtain coverage from any insurance company for losses above a certain Maximum.
These organizations' members are life and health insurance agents dedicated to supporting the industry and advancing the quality of service provided by insurance professionals.
NAIFA: National Association of Insurance and Financial Advisors HAHU: National Association of Health Underwriters
Social Security
Old-Age, Survivors, and Disability Insurance (OASDI)
Preferred provider organization (PPO)
PPOs are contracts between the employer groups and the health care professional (hospital or physician) that spell out what types of services will be provided. Employer groups will obtain price discounts or special services from select providers in exchange for referring its members (employees) to them.
Mass Marketing
Provides exposure to large groups of consumers using direct mail or newspaper, magazine, radio, TV ads.
Social Insurance Programs
Ranging from drop insurance to bank and savings and loan deposit insurance. Government as insurer
Reinsurers
Reinsurers insure insurers. Reinsurance is an arrangement by which an insurance company transfers a portion of a risk it has assumed to another insurer. -Ceeding and reinsurer
Agents
Represent a particular company -classified as captive or career agents and independent agents.
Fair Credit Reporting Act of 1970
Requires fair and accurate reporting of information about consumers, including applications for insurance. Insurers must inform applicants about investigations being made and the name of the reporting agency conducting the investigation. Financial Services Modernization Act 1999 / Gramm-Leach-Bliley. Repealed Glass-Steagall Act Commercial banks, investment banks, retail brokerages, and insurance companies can now enter each other's lines of business.
Government Life insurance programs for active members of armed devices and veterans
Servicemembers' Group life insurance, Veterans' Group Life insurance, and National Service Life Insurance. SGLI VGLI NSLI
What are the 9 private insurers
Stock insurer Mutual insurers Reciprocal insurers Lloyd's of London (Lloyd's) Reinsurers Risk-retention groups (RRG) Fraternal benefit societies Home service insurers Service providers
Unfair Trade Practices Act
The NAIC's Unfair Trade Practices Act provides state insurance commissioners and directors (CFO in Florida) the ability and power to investigate, issue cease and desist orders, and impose penalties on violations made by insurance carriers and producers. Some unfair or deceptive practices that may be enforced include: (1)misrepresentation and false advertising; (2) coercion and intimidation; (3) unfair discrimination, and (4) inequitable administration or claims settlements
Intervention by the SEC 1959
The Supreme Court ruled that federal securities laws applied to insurers that issued variable annuities and, thus, required these insurers to conform to both SEC and state regulation. The SEC also regulates variable life insurance.
Paul vs. Virginia (1868)
The Supreme Court ruled that the sale and issuance of insurance is not interstate commerce, thus upholding states' right to regulate insurance.
Home service insurers (Debt insurers)
These insurers market a specialized form of insurance called industrial insurance. Industrial insurance policies are relatively small faced amounts ($1,000 - $2,000) with premiums collected in person every week.
Advertising Code
This code, established by NAIC, specifies certain words and phrases that the industry considers misleading and cannot be used in advertising of any kind.
U.S. vs. Southeastern Underwriters Association (S-EUA) (1944).
This decision did not affect the State's power to regulate insurance. However, it did nullify state laws that conflicted with federal legislation. This resulted in shifting the balance of regulatory control to the federal government.
National Association of Insurance Commissioners (NAIC)
This organization is comprised of all state insurance commissioners and directors. The NAIC has four broad objectives: (1) to encourage uniformity in-state insurance laws and regulations; (2) to assist in the administration of those laws and regulations by promoting efficiency; (3) to protect the interests of policyholders and consumers; and (4) to preserve state regulation of the insurance business. -The members of the NAIC do not prosecute and punish violators. The NAIC most notable accomplishment is the "Advertising Code and the Unfair Trade Practices Act."
Mutualization
Transformation of a stock insurer into a mutual insurer.
not licensed
Unauthorized, non admitted
buyer's guide
a document approved by the Florida Department of Insurance that provides generic information about an insurance policy. It provides the buyer with an explanation on how to choose the type of insurance, the amount, costs, and more. The insurer must provide a buyer's guide to all prospective policy applicants before accepting their initial premium. If the policy contains an unconditional refund provision of at least a 10-day (free-look period), a buyer's guide can be delivered with the policy.
A policy summary
a document written by the insurance company that describes specific features and elements of the policy being issued. The policy summary must include the name and address of the agent, full name and home office or administrative office address of the insurer, and the generic name of the basic policy and each rider. A policy summary document will also provide premium, cash value (CV), dividend, surrender value, and death benefit figures for specific policy years. The policy summary also contains two cost indexes that help the consumer evaluate the recommended products' suitability. The policy summary must be provided when the policy is delivered.
The company transferring the risk
ceding company
Surrender cost comparison index
compares the cost of surrendering the policy and withdrawing the cash values at some future time
Net Payment Cost Comparison Index
gives the buyer an idea of the cost of the policy at some future point in time compared to the death benefit
The Major difference between government programs and Private insurance programs
government programs are funded with taxes and serve national and state social purposes.
Direct selling
insurer deals directly with consumers, selling its policies through advertisements or salaried sales representatives; no agent or broker involved. -Insurers that operate using this method are known as Direct Writers or Direct response insurers.
Demutualize
mutual insurer converting to stock insurer
Brokers
not tied to any particular company and can represent many companies' products In a sales transaction, agents represent the insurer and brokers represent the buyer
Participating
policy owner receives dividends of the divisible surplus of the company
producers
present insurers' products and services to the public via active sales and marketing methods.
Types of insurance providers
private and government
Policy dividends
refund of the portion of premiums that remains after the insurance company has set aside the necessary reserves and had made deductions for claims and expenses
The company assuming the risk
reinsurer
Independent agents
work for himself or for other agents and sells the insurance products of many companies
captive or career agent
works for one insurance company and sell only that company insurance policies.