Insurance "Imma Do Ma Own Thing" Ch.1

Risk transfer

You give your risk to the insurance company

Premium pooling

Everyone pays in, and the money is pooled to cover claims

Indemnification

Restoring you to where you were before the loss

Insured

The person getting protection

Insurer

The company providing coverage

Premium

The payment you make for coverage

Policy owner

The person who transfers risk to the insurer

Stock Insurance Company

Owned by shareholders; issues nonparticipating policies; profits go to stockholders

Mutual Insurance Company

Owned by policyholders; issues participating policies; policyholders receive dividends and elect the board

Fraternal Benefit Society

Non-profit; has a lodge system with ritualistic work; exists for reasons beyond insurance

Reciprocal Insurer

Members (subscribers) insure each other; risk-sharing mechanism, not risk transfer

Risk Retention Group (RRG)

Created under federal law (LRRA 1986); members with a common bond pool liability risks

Risk Purchasing Group (RPG)

Created under LRRA 1986; buys insurance from an insurer as a group; doesn't act as insurer

Captive Insurer

Owned by a parent company to insure the parent's risks

Surplus Lines Insurer

Non-admitted insurer; covers unusual risks regular insurers won't touch

Lloyd's of London

NOT an insurer; a marketplace where syndicates underwrite risks

Service Provider

Sells medical/hospital care services (not insurance) for a premium

HMO

Health Maintenance Organization; fixed premium; specific network; focuses on preventive care

PPO

Preferred Provider Organization; group gets discounts from select providers

Industrial Insurer

Sells small life policies ($1,000–$2,000); agent visits home weekly to collect premiums

Authorized (Admitted) Insurer

Has a license (certificate of authority) to sell insurance in a state

Unauthorized (Nonadmitted) Insurer

Not licensed in a state; can only offer surplus lines coverage

Certificate of Authority

License from the state Department of Insurance to sell insurance

Domestic Insurer

Incorporated in the state where it's doing business

Foreign Insurer

Incorporated in another state (but still in the U.S.)

Alien Insurer

Incorporated in another country

Producer

Licensed individual who solicits the sale of insurance

Agent

Represents one or more insurers; works for the insurance company

Broker

Represents themselves and the insured (the client)

Solicitor

Not licensed to sell; represents a producer and refers prospects

Service Representative

Company employee; no sales, no commissions; usually no license needed

Underwriter

Identifies, assesses, and classifies risk; decides whether to insure and at what cost

Actuary

Calculates policy rates, reserves, and dividends; does statistical studies

Adjuster

Investigates claims; adjusts, settles, or denies them

Public Adjuster

Acts on behalf of insureds for compensation to help settle claims

Direct Selling

Insurer deals directly with consumers (vending machines, ads, salaried reps)

Mass Marketing

Reaching many consumers at once (internet, newspapers, TV, radio)

Captive/Career Agent

Works for one insurance company; sells only that company's policies

Independent Agent

Works for themselves; sells products from many companies

Career Agency System

Branch of a major insurer; General Agent recruits, trains, and supervises agents

Managerial System

Insurer opens branch offices; employs a salaried branch manager

General Agent (GA)

Recruits, trains, and supervises agents; has a vested right in business written

Personal Producing General Agency (PPGA)

Focuses on sales

Reinsurance

Insurance for insurance companies; one insurer transfers risk to another

Primary Insurer (Ceding Company)

The insurer that transfers risk to another insurer

Reinsurer (Assuming Company)

The company assuming the risk

Net Retention (Net Line)

The portion of risk the ceding insurer keeps

Treaty Reinsurance

Automatic sharing of risks based on pre-established criteria

Facultative Reinsurance

One-time deal for a specific risk; no ongoing agreement

Paul v. Virginia (1868)

Supreme Court ruled insurance is NOT interstate commerce; states regulate

US v. SEUA (1944)

Supreme Court reversed; insurance IS interstate commerce; feds can regulate

McCarran-Ferguson Act (1945)

Returned primary regulation to states; federal antitrust laws still apply

Fair Credit Reporting Act (1970)

Protects consumer privacy; insurers must disclose investigations and reporting agencies

Fraud and False Statements Act (1994)

Requires written consent from regulators for those with dishonesty-related felonies

Gramm-Leach-Bliley Act (1999)

Broke down barriers between banking, insurance, securities; created privacy rules

USA PATRIOT Act (2001)

Requires financial institutions to help detect and prevent terrorism financing

Do Not Call Implementation Act (2003)

Created National Do Not Call Registry; exempts charities, political orgs, surveys

CAN-SPAM Act (2003)

Rules for commercial email; requires accurate headers, opt-out, physical address

NAIC

National Association of Insurance Commissioners; writes model laws; doesn't enforce

NCOIL

National Conference of Insurance Legislators; state legislators; writes model laws

State Insurance Department

Primary regulator; issues licenses, enforces laws

Rating Services

Private companies (A.M. Best, Fitch, S&P, Moody's) that grade insurer financial strength

Reserves

Money set aside for future obligations to policyholders (a liability)

Liquidity

A company's ability to make unpredictable payouts to policyholders

Adverse Selection

Selection against the insurance company; high-risk individuals are more likely to seek or maintain coverage

Balanced Risk Pool

A mix of preferred, average, and a limited number of higher-risk individuals

Law of Large Numbers

Helps balance risk in group insurance

Law of Large Numbers

Statistical principle – as the number of similar, independent exposure units increases, actual losses match expected losses more closely

Independence

One exposure unit's loss doesn't affect another's

Similarity

All exposure units face the same type of risk

Large Number

A sufficiently large pool of exposure units

Peril

The immediate, specific event that causes a loss

Named (Specified) Perils

Policy lists the specific perils it covers; if not listed, not covered

Open (Special) Perils

Policy covers all perils except those specifically excluded

Loss

Unintended and unforeseen reduction or destruction of financial or economic value

Hazard

Something that increases the chance a peril will occur

Physical Hazard

Tangible condition that makes a loss more likely (e.g., icy roads, faulty wiring)

Moral Hazard

Dishonest character of the insured makes loss more likely; intentional wrongdoing

Morale Hazard

Careless attitude or indifference because the person has insurance; unintentional

Risk

The potential for, or uncertainty of, loss

Speculative Risk

A risk that presents the chance for both loss and gain; NOT insurable

Pure Risk

A risk that presents a potential for loss only; no chance of gain; insurable

STARR

Sharing, Transfer, Avoidance, Reduction, and Retention

Risk Sharing

Spreading risk among multiple parties; each assumes a portion

Risk Transfer

A legal contract that transfers risk from one party to another

Risk Avoidance

Eliminating an activity or condition that exposes you to loss; most complete form of risk management

Risk Reduction

Taking deliberate actions to reduce the likelihood, frequency, or severity of a loss

Risk Retention

Consciously keeping reserves to cover unexpected losses

Reinsurance

Transferring risk from one insurer to one or more other insurers

Coinsurance

A risk-sharing mechanism where the insurer and insured split the risk (e.g., 80/20)

Deductible

A risk retention mechanism where the insured pays a set amount before insurance kicks in

Competent Parties

Both parties must be legally capable of entering a contract (legal age, sound mind)

Legal Purpose

The contract must be for a lawful purpose

Offer and Acceptance

An agreement between parties; applicant makes the offer, insurer accepts

Consideration

Something of value exchanged by both parties (premium from insured, promise to pay from insurer)

Policy Owner

The person who owns the policy (usually the insured)

Insurer

The insurance company that promises to pay benefits

Aleatory Contract

A contract where one party may recover more value than they paid, depending on uncertain future events

Contract of Adhesion

One-sided contract written by the insurer; take it or leave it