Chapter 1: Basic Principles of Life and Health Insurance

Mutual Insurance Companies

Owned by policyholders; issue participating policies; policyholders receive dividends and elect the board of directors.

Fraternal Benefit Societies

Non-profit organizations that must have a lodge system and ritualistic work, existing for reasons beyond insurance.

Reciprocal Insurers

Members insure each other.

Risk Retention Groups (RRGs)

Created under federal law for liability insurance.

Captive Insurers

Owned by a parent company to insure its risks.

Key Departments in Insurance Companies

Essential departments include Marketing/Sales, Underwriting, Claims, and Actuarial.

Marketing/Sales Department

Increases prospective applicants.

Underwriting Department

Reviews applications and assigns risk classifications.

Claims Department

Processes and pays claims.

Actuarial Department

Calculates rates, reserves, and dividends.

Insurance Definition

Insurance is a legal contract that transfers risk from the policyholder to the insurer.

Premium Pooling

Spreads risk across many policyholders.

Indemnification

Restoring an insured to their pre-loss financial position.

Key Difference: Life Insurance vs. Other Insurance

Life insurance uses valued contracts (predetermined amount), while most other insurance uses indemnity contracts.

Insured

Person receiving insurance protection.

Insurer

Company providing coverage and assuming risk.

Premium

Payment made for insurance coverage.

Policy Owner

Person who transfers risk to insurer.

Stock Insurance Companies

Owned by shareholders, issue nonparticipating policies, and profits go to stockholders.

NAIC Functions

Promotes uniform state laws, creates model regulations, protects consumer interests, and preserves state regulation.

NAIFA

Professional association for agents.

Rating Services

Evaluate insurer financial strength (e.g., A.M. Best).

Producers (Agents/Brokers)

Sell insurance products.

Key Legislation

Paul v. Virginia (1868) established state regulation; McCarran-Ferguson Act (1945) returned regulation to states.

Insurance Distribution Systems

Includes Career agency system, Independent agency system, Personal producing general agency, and Direct selling.

Captive Agents vs. Independent Agents

Captive agents work for one company, while independent agents represent multiple companies.

Brokers

Represent the buyer.

Solicitors

Not licensed to sell, only refer.