Chapter one basics of life and health insurance

Insurance

the transfer of risk from one party to another.

Policy owner

The person who purchases an insurance policy and pays a premium in return.

Principle of indemnity

restoring insured back to prior financial status that they were before the loss occurred.

types of indemnity insurance

health, property, accident, and casualty

Valued contracts

contracts with predetermined amount established before loss has occurred.

Types of insurance companies

Private, government (social), and self-insurers

Private insurance

private citizen owned commercial insurance company

i.e. profit-motivated stock company

Government insurance

social insurance providers like crop insurance or FDIC

Self-insurers

a self funded plan to cover potential losses

Social insurance

federal or state owned government insurers. Covers losses not insured by commercial insurers.

e.g. Medicaid and Social Security

Private insurance

life and annuities, health and accidental, property and casualty.

Multi-line insurers

insurance company that sells more than one lien of insurance

Mono-line insurers

only sells one line of insurance

Stock company (non-participating)

Insurance company owned by private investors. Publicly traded commercial entities that are organized and incorporated under state laws to make a profit for their stockholders. Stockholders are policy owners but do not own the company.

Non-participating because policy owners do not own the company.

Mutual companies (participating)

Organized and incorporated under state laws ownership rests with the policy owners. Person or policy owner becomes a customer and an owner of insurer.

Policy owners are participating by voting for board of directors and receiving policy dividends.

Divisible surplus

excess earnings held that are returned to policyholders.

Mutualization

stock company transforms into a mutual company.

De-mutualization

Mutual companies becomes stock companies.

Mixed plan

a company that issues both social and mutual policies.

Participating

Policyholders elect their own board of directors and receives dividends from the divisible surplus.

Non-participating

stockholders elect board and receive dividends; policyholders do not.

assessment mutual insurers

loss-sharing by group members and no premium is payable in advance. Losses are assessed per member.

Advanced assessment mutual company

charges a premium at the beginning of the policy period. Surplus is returned if premium is greater than operating expenses and losses.

Fraternal Benefit Societies

Social, charitable, benevolent activity based society that issue insurance to cover their members.

non-profit and must perform work outside of issuing insurance.

Reciprocal Insurers

An unincorporated organization that is overseen by a board of governors or directors in which individual members agree to insure one another.

The policy holders insure each others risks. An attorney-in-fact handles transactions for the reciprocal insurer.

Risk Retention Groups (RRGs)

A specialized insurance company that is created under the terms of Federal Liability Risk Retention Act (LRRA) of 1986 to provide liability insurance for those with a common business or occupation.

Risk Purchasing Groups (RPGs)

Similar to RRGs but different on the fact that RPGs purchase insurance from an insurance company; they do not act as insurers.

Master policy holders: members receive certificates of insurance.

Reinsurers

An insurance company that transfers a portion of an assumed risk to another insurer.

Primary insurer transfers risk to a reinsurer through a treaty of reinsurance.

Captive insurer

an insurer that is established and owned by a parent firm or group of firms that insures the parent’s loss exposure.

e.g. RRG

Surplus lines insurance

Non-traditional insurance market where surplus carriers provide coverage for unusual risks or unique situations.

service providers

sell medical and hospital care services to their subscribers in return for premium payment.

e.g. Health management organization

Lloyd’s of London

a syndicate of individuals and companies that individually underwrite insurance.

Industrial insurer

Home service or debit insurers specialize in a particular type of insurance that’s referred to as industrial insurance.

Small face amounts and agents collect premium from policy owner’s homes.

Insurers classified by authorization

Insurance statutes require a company to secure a license from the Department of Insurance to sell insurance in a particular state. An insurer that’s admitted or authorized to transact insurance business in a particular state via a certificate of authority.

Insurer classified according to domicile

method for classifying insurance carriers is by organizing them based on where they’re incorporated. Often this is the jurisdiction in which they have their corporate headquarters or domicile of incorporation.

Domestic insurer

incorporated under the laws of the state in which it conducts insurance business

Foreign insurer

conducting insurance business in a state other than where its offices are located.

Alien insurer

the insurer is incorporated in a country other than the United States.

Departments within an insurance company

Marketing, underwriting, claims, and actuarial

Marketing

The marketing department is responsible for increasing the number of prospective applicants, thereby increasing the number of insureds through various advertising mediums

Underwriting

This department is responsible for reviewing applications, conducting investigations to gain additional information about applicants, assigning risk classifications, and approving or declining an application.

Claims

The claims department is responsible for processing, investigating, and paying claims for losses that are incurred by insureds.

actuarial

The actuarial department calculates policy rates, reserves, and dividends and makes other applicable statistical studies and reports that focus on morbidity and mortality tables.

Producer

the individuals who solicit the sale of insurance products to the public.

Agents

Agents represent one or more insurers under the terms of their appointment contract.

Brokers

Brokers represent themselves and the insured (i.e., the client or customer).

Solicitors

A solicitor is not licensed to sell insurance. Instead, a solicitor represents a producer and solicits prospective applicants to meet and discuss their insurance needs with that producer on their behalf.

Service representatives

Service representatives are insurance company employees who do not engage in sales activities that pay commissions. These individuals are not required to be licensed unless they receive commissions, solicit, countersign policies, or collect premiums from policy owners.

Underwriters

identify, assess, examine, and classify the amount of risk represented by an applicant (proposed insured) to determine whether coverage should be provided and, if so, at what cost (premium). An underwriter approves or declines insurance applications and determines the cost to provide insurance. 

Actuaries

concerned with the cost of insurance as a whole or the cost for a specific class of risk.

calculate policy rates, reserves, and dividends.

Adjuster

a person who engages in investigative work to obtain information for adjusting, settling, or denying insurance claims.

How insurance is sold

Most consumers purchase insurance through licensed producers who market insurance products and services to the public.

Career agencies

recruit, train, and supervise agents through managers or general agents. These agencies primarily build staff.

Personal Producing General Agent (PPGA)

don’t recruit, train, or supervise agents. These agencies primarily sell insurance.

Independent agents (American agency system)

represent any number of insurance companies through contractual agreements

Managerial system

The managerial system is a form of career agency. In the managerial system, the insurance company establishes branch offices in multiple locations. Rather than contracting with a general agent to run the agency, the insurer employs a salaried branch manager. The branch manager supervises agents who work out of that branch office. The insurer pays the branch manager’s salary and a bonus based on the amount and type of insurance sold and the number of new agents hired.

NAIC

All state insurance regulators (commissioners, superintendents, or directors) are members of the National Association of Insurance Commissioners. This organization brings together regulators and industry personnel on committees that regularly examine various aspects of the insurance industry and recommend applicable insurance laws and regulations.

NAIC unfair trade practices act

This Act gives the head of each state insurance department power to investigate insurance companies and producers, but it also authorizes them to issue cease and desist orders and to impose penalties. The Act gives officers the authority to seek a court injunction to restrain insurers from using any methods that are believed to be unfair. The individual practices which are identified in the model as unfair include misrepresentation and false advertising, coercion and intimidation, unfair discrimination, and inequitable administration of claims settlements.

NAIC advertising code

In the past, a principal problem for states was the regulation of misleading insurance advertising and direct mail solicitations. Many states now also subscribe to the Model Advertising Code, which was developed by the NAIC. The code specifies certain words and phrases that are considered misleading by their very nature. These words or phrases cannot be used in the advertising of any kind of insurance. The code also requires the complete disclosure of policy renewal, cancellation, and termination provisions.

National Conference of Insurance Legislators (NCOIL)

a legislative organization that focuses on the insurance industry. The membership is principally comprised of state legislators from around the nation that serve on state insurance and financial institutions committees.

FINANCIAL ADVISORS (NAIFA) AND THE NATIONAL ASSOCIATION OF HEALTH UNDERWRITERS (NAHU)

are life and health agents who are dedicated to supporting the industry and advancing the quality of service being provided by insurance professionals. These organizations created a Code of Ethics which details the expectations of agents in their duties toward clients.

Agent Marketing and Sales Practices

The marketing and selling of financial products require a high level of professionalism and ethics. Some of the standards in various states include: selling to needs, suitability of recommended products, full and accurate disclosure, documentation, client service

producer responsibility

A producer is a conduit between the company and the insurance-buying public.

• Providing customers with the best service possible.

• Soliciting new business for his company by helping clients acquire products from application to policy delivery.

• Guiding customers to the right products that meet their needs and maintaining a relationship with them.

• Building a business by keeping current customers satisfied and also actively seeking referrals.

Rating service

is to determine the rated insurance company’s (i.e., the insurer’s) financial strength. An insurer’s financial strength can be evaluated by examining the company’s reserves and liquidity.

Reserves

 the accounting measurement of an insurer’s future obligations to its policyholders. They are classified as liabilities on the insurance company’s accounting statements since they must be settled at a future date.

Liquidity

indicates a company’s ability to make unpredictable payouts to policy owners.

Paul v. Virginia (1868)

The United States Supreme Court ruled that insurance is not interstate commerce, thereby upholding the states’ right to regulate it.

he United States v. Southeastern Underwriters Association (SEU) (1944)

The United States Supreme Court reversed Paul v. Virginia and ruled that insurance is a form of interstate commerce and is subject to federal regulation.

The McCarran-Ferguson Act(1945)

Congress responded to the SEU decision by delegating the regulation of insurance to the states while requiring compliance with federal antitrust standards – either directly or through comparable state laws. McCarran-Ferguson (also referred to a Public Law 15) also levied a maximum penalty of up to one year in jail and a fine of $10,000 for violators. 

The Fair Credit Reporting Act (1970)

This Act was established to protect privacy by requiring the fair and accurate reporting of consumer information.

Amendments to USC 1033 and 1034 regarding Fraud and False Statements (1994)

prohibits felons (those guilty of crimes involving dishonesty or breach of trust) from participating in the insurance industry without a “Letter of Written Consent” from their state insurance regulator. Any person who engages in intentionally unfair or deceptive insurance practices is subject to a fine of up to $50,000, 15 years in prison, and license revocation.

The Financial Services Modernization Act (1999)

This Act allowed banks to sell insurance and prompted states to create regulations for insurance companies to protect the privacy of consumer personal information.

The USA PATRIOT Act (2001)

This Act focuses on the funding sources for terrorists and international money laundering in general.

The Do Not Call Implementation Act (2003)

implemented the Do Not Call Registry, which allows consumers to opt-out of receiving calls from telemarketers, except for those on behalf of charities, political organizations, and surveys.

2003-CAN-SPAM Act

This Act outlines the right for consumers to request a business to stop sending emails, the requirements for businesses to honor such requests, and the penalties incurred for those who violate the Act. The Act does not apply to transactional and relationship messages.