Chapter 1: Basic Principles of Life & Health Insurance

agent

an individual authorized to solicit, sell, and transact coverage for specific insurance providers under an agent contract

broker

a person who represents the insured (client) rather than the insurance company and cannot bind coverage

claims department

the department responsible for processing, investigating, and paying claims

insurance

the transfer of risk through the pooling or accumulation of funds

insured

the customer who receives insurance protection under an insurance policy

insurer

an insurance company that provides coverage and assumes risk

mutual insurance company

an insurer owned by policyholders that typically issues participating insurance policies with potential dividends; policyholders elect the board of directors

nonparticipating policy

a policy that doesn't provide dividends or voting rights to policy owners

participating policy

a policy that allows policy owners to receive dividends and elect the board of directors

producer

an individual licensed to sell, solicit, or transact insurance, including both agents and brokers

stock insurance company

an insurer owned by stockholders that typically issues nonparticipating policies, profits go to stockholders, publicly traded entities

underwriting department

the department responsible for reviewing applications, approving or declining coverage, and assigning risk classifications

risk transfer

shifting financial risk from an individual to an insurance company

premium pooling

spreading risk across many policyholders

indemnification

restoring an insured to their pre-loss financial position and shall not profit or gain from loss

premium

the payment made for insurance coverage

policy owner

the person who transfers risk to the insurer

fraternal benefit society

a nonprofit organization with a lodge system that includes ritualistic work and must maintain a representative government form with elected officers, and exists for reasons beyond insurance

reciprocal insurer

members insure one another

risk retention group (RRG)

a special type of liability insurance company owned by the businesses or organizations it insures; allows companies with similar operations or risk profiles to pool their resources and self-insure their commercial liability (truckers, doctors, or non-profits)

risk purchasing group (RPG)

an organization of businesses or entities with similar or related liability risks that band together to buy commercial liability insurance from an outside, licensed insurance company; make it easier for specialized or niche groups to access affordable coverage (food truck operators, trade contractors, or specific professional associations)

captive insurer/insurance

a licensed, private insurance subsidiary established and wholly owned by one or more non-insurance companies (its parents or members) to insure or reinsure their own unique risks

actuarial department

responsible for assessing risk and determining policy rates by use of mathematical and statistical methods to evaluate the likelihood of future events and calculate dividends for policyholders, ensuring that the company remains financially stable while providing returns to its clients

insurance/claims adjuster

a professional who investigates, assesses, and settles insurance claims after a loss (car accident, home fire, or property damage)

career agency system

a method of selling insurance where a specific insurance company recruits, trains, and manages its own dedicated sales team

independent agency system

an insurance sales setup where self-employed agents or agencies sell insurance policies from multiple different insurance companies

personal producing general agency (PPGA)

an independent insurance agent or small agency whose main job is selling insurance

direct selling

buying an insurance policy straight from the insurance company without using an outside agent, broker, or middleman

captive agent

an insurance salesperson who works for only one specific insurance company (State Farm, Allstate, or Farmers)

independent agent

a licensed salesperson who sells insurance policies from multiple different companies

solicitor

a licensed assistant who works under a licensed insurance agent or broker to find clients, gather information, and explain policy options

Paul v. Virginia (1868)

ruled insurance is not interstate commerce, giving individual states the sole power to regulate the insurance industry

United States v. Southeastern Underwriters Association (SEUA) (1944)

ruled that insurance is interstate commerce and therefore subject to federal antitrust laws (overturned Paul v. Virginia (!868))

McCarran-Ferguson Act (1945)

ruled to preserve and establish the primary role of individual U.S. states in regulating and taxing the insurance industry, while providing a limited exemption from federal antitrust laws

Fair Credit Reporting Act (1970)

to promote the accuracy, fairness, and privacy of personal information assembled by consumer reporting agencies (CRAs)

Fraud and False Statements Act (1994)

created significant barrier for individuals with felony convictions involving dishonesty or breach of trust; penalties: fine of $50k, 10-15 years of imprisonment, and license revocation

Gramm-Leach-Bliley Act (1999)

includes privacy requirements

USA Patriot (Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism) Act (2001)

new requirements for financial institutions to help prevent terrorism financing; aims to detect, deter, and disrupt terrorist funding efforts through anti-money laundering education programs and information-sharing procedures

Do Not Call Implementation Act (2003)

restrictions on commercial calls; exemptions for charities, political organizations, surveys

CAN-SPAM Act (2003)

established rules for commercial email communications; accurate headers, ad identification, physical address, opt-out method, honor opt-outs within 10 business days

National Association of Insurance Commissioners (NAIC)

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

National Conference of Insurance Legislators (NCOIL)

a legislative organization focused on insurance; works to preserve state insurance regulation, educate policymakers, and develop model laws for legislatures to consider

National Association of Insurance and Financial Advisors (NAIFA)

a professional association for insurance and financial advisors that supports the industry and promotes quality service from insurance professionals

state insurance departments

primary regulators that issue licenses and enforce regulations

rating services

evaluate insurers’ financial strength

valued contract

pays a predetermined amount

marketing department

helps increase consumer awareness and interest in an insurer’s products; uses advertising and outreach, and monitors industry trends and consumer perceptions to adjust its marketing strategies

sales department

responsible for selling the insurer’s products to help attract prospective applicants