Maryland Life Chapter 1

Agent/Producer

a legal representative of an insurance company

Applicant or proposed insured

a person applying for insurance

Beneficiary

a person who receives the benefits of an insurance policy

Broker 

an insurance producer not appointed by an insurer and is deemed to represent the client

Indemnity

main principle of insurance, meaning that the insured cannot recover more than their loss; the purpose of insurance is to restore the insured to the same position as before the loss

Insurance policy

a contract between a policyowner (and/or insured) and an insurance company which agrees to pay the insured or the beneficiary for loss caused by specific events

Insured

the person covered by the insurance policy. This person may or may not be the policyowner

Insurer (principal)

the company who issues an insurance policy

Law of large numbers

the larger the number of people with a similar exposure to loss, the more predictable actual losses will be

Policyowner 

the person entitled to exercise the rights and privileges in the policy

Premium 

the money paid to the insurance company for the insurance policy

Reciprocity/Reciprocal

a mutual interchange of rights and privileges

Insurance

is a contract in which one party (the insurance company) agrees to indemnify (make whole) the insured party against loss, damage or liability arising from an unknown event. In life insurance, the policy protects survivors from losses suffered after an insured’s death.

Insurance

is the transfer of risk of loss. The cost of an insured's loss is transferred over to the insurer and spread among other insureds.

Risk

is the uncertainty or chance of a loss occurring

Pure risk

refers to situations that can only result in a loss or no change. There is no opportunity for financial gain.

- is the only type of risk that insurance companies are willing to accept

Speculative risk

involves the opportunity for either loss or gain. An example is gambling. These types of risks are not insurable

Hazards

are conditions or situations that increase the probability of an insured loss occurring

Perils

are the causes of loss insured against in an insurance policy

Life insurance

insures against the financial loss caused by the premature death of the insured

Health insurance

insures against the medical expenses and/or loss of income caused by the insured’s sickness or accidental injury

Property insurance

insures against the loss of physical property or the loss of its income-producing abilities

Casualty insurance

insures against the loss and/or damage of property and resulting liabilities

Loss

is defined as the reduction, decrease, or disappearance of value of the person or property insured in a policy, caused by a named peril

Know This

A risk is a chance that a loss will occur; a hazard increases the probability of loss; a peril is the cause of loss.

Exposure

is a unit of measure used to determine rates charged for insurance coverage

In life insurance, all of the following factors are considered in determining rates:

• The age of the insured;

• Medical history;

• Occupation; and

  • Sex.

homogeneous

The basis of insurance is sharing risk among the members of a large _______ group with similar exposure to loss.

Avoidance

One of the methods of dealing with risk is _______, which means eliminating exposure to a loss

Retention

the planned assumption of risk by an insured through the use of deductibles, co-payments, or self-insurance

Sharing

method of dealing with risk for a group of individual persons or businesses with the same or similar exposure to loss to share the losses that occur within that group

Reduction

we usually cannot avoid risk entirely, we often attempt to lessen the possibility or severity of a loss. _________ would include actions such as installing smoke detectors in our homes, having an annual physical to detect health problems early, or perhaps making a change in our lifestyles

Transfer

the loss is borne by another party. Insurance is the most common method of ________ risk from an individual or group to an insurance company

Due to chance

A loss that is outside the insured’s control

Definite and measurable

 A loss that is specific as to the cause, time, place and amount. An insurer must be able to determine how much the benefit will be and when it becomes payable.

Statistically predictable

Insurers must be able to estimate the average frequency and severity of future losses and set appropriate premium ratesNot catastrophic

Not catastrophic

Insurers need to be reasonably certain their losses will not exceed specific limits

Randomly selected and large loss exposure

There must be a sufficiently large pool of the insured that represents a random selection of risks in terms of age, gender, occupation, health and economic status, and geographic location

adverse selection

Insurance companies strive to protect themselves from _________, the insuring of risks that are more prone to losses than the average risk.

insurance companies have an option to refuse or restrict coverage for bad risks, or charge them a higher rate for insurance coverage

Law of Large Numbers

states that the larger the number of people with a similar exposure to loss, the more predictable actual losses will be

sharing risk among a large pool of people with a similar exposure to loss

Reinsurance

is a contract under which one insurance company (the reinsurer) indemnifies another insurance company for part or all of its liabilities. The purpose of ________ is to protect insurers against catastrophic losses. The originating company that procures insurance on itself from another insurer is called the ceding insurer (because it cedes, or gives, the risk to the reinsurer). The other insurer is called the assuming insurer, or reinsurer.

insurer

any person or company engaged as the principal party in the business of entering into insurance contracts

government programs

are funded with taxes and serve national and state social purposes

private policies

are funded by premiums

Stock companies

owned by the stockholders who provide the capital necessary to establish and operate the insurance company and who share in any profits or losses

nonparticipating policies

policyowners do not share in profits or losses

does not pay dividends to policyowners; however, taxable dividends are paid to stockholders

dividends are not guaranteed as they are based on company profit

Mutual Companies

are owned by the policyowners and issue participating policies

With participating policies, policyowners are entitled to dividends (surplus), which are a return of excess premiums and are, therefore, nontaxable

mutual assessment insurer

mutual insurance company with the right to assess policyholders' additional amounts of premium to meet operational needs

• profits are distributed to the policyholders

• if loses money in a given year, all policyholders can be assessed their fair share of the losses

fraternal benefit society

an organization formed to provide insurance benefits for members of an affiliated lodge, religious organization, or fraternal organization with a representative form of government

• sell only to their members and are considered charitable institutions, and not insurers

risk purchasing group

an entity which offers insurance to groups of similar businesses with similar exposures to risk

The policy is based on the insured's loss and expense experience and is not afforded to other policyholders with respect to rates, policy forms, or coverages

social insurance programs

Federal and state governments provide insurance in the areas where private insurance is not available

Government insurance programs include Social Security, Medicare, Medicaid, Federal Crop insurance and National Flood insurance

Private vs. Government Insurers

is that the government programs are funded with taxes and serve national and state social purposes, while private policies are funded by premiums.

Certificate of Authority

Before insurers may transact business in a specific state, they must apply for and be granted a license

authorized or admitted

Insurers who meet the state's financial requirements and are approved to transact business in the state

unauthorized or nonadmitted

Those insurers who have not been approved to do business in the state

location of incorporation

• domicile

• Insurance companies are classified according to the location of incorporation

  • insurance companies regardless of where it is must obtain a Certificate of Authority before transacting insurance within the state

domicile

refers to the location where an insurer is incorporated, not necessarily where the insurer conducts business

domestic

company that is incorporated in this state

foreign

company that is incorporated in another state, the District of Columbia, or a territorial possession

alien

company that is incorporated outside the United States

financial strength

based on prior claims experience, investment earnings, level of reserves (amount of money kept in a separate account to cover debts to policyholders), and management

financial integrity

are published regularly by the following various independent rating services:

• AM Best

• Fitch

• Standard and Poor's

• Moody's

• Weiss

Independent Agency System/
American Agency System

• One independent agent represents several companies

• Nonexclusive

• Commissions on personal sales

• Business renewal with any company

Exclusive Agency System/
Captive Agents

• One agent represents one company

• Exclusive

• Commissions on personal sales

• Renewals can only be placed with the appointing
  insurer

General Agency System

• General agent-entrepreneur represents one company

• Exclusive

• Compensation and commissions

• Appoints subagents

Managerial System

• Branch manager (supervises agents)

• Salaried

• Agents can be insurer’s employees or independent contractors

Direct Response Marketing System

• No agents

• Company advertises directly to consumers (through mail, Internet, television, other mass marketing)

  • Consumers apply directly to the companyI

Insurance Companies

Exclusive or captive agents

represent only one company and are compensated by commissions

Independent agents

sell the insurance products of several companies and work for themselves or other agents

producer

individual licensed to sell, solicit, or negotiate insurance contracts on behalf of the principal (insurer)

considered an agent of the insurer

law of agency

defines the relationship between the principal and the producer: the acts of the agent within the scope of authority are deemed to be the acts of the insurer

Know This

Insurance agents represent the insurer (principal). "Who is your pal? The principal!"

Express authority

authority a principal intends to grant to an agent by means of the agent’s contract. It is the authority that is written in the contract

Implied authority

authority that is not expressed or written into the contract, but which the agent is assumed to have in order to transact the business of insurance for the principal

Apparent authority

is the appearance, or the assumption of authority based on the actions, words, or deeds of the principal or because of circumstances the principal created

fiduciary responsibility

Although the agents act for the insurer, they are legally obligated to treat applicants and insureds in an ethical manner. Because an agent handles the funds of the insured and the insurer

illegal for insurance producers to commingle premiums collected from the applicants with their own personal funds

Market conduct

describes the way companies and producers should conduct their business

Code of Ethics

Producers must adhere to certain established procedures, and failure to comply will result in penalties

Some of the market conduct regulations include, but are not limited to, the following:

• Conflict of interest;

• A request of a gift or loan as a condition to complete business; and

• Supplying confidential information.

Professionalism

person is engaged in an occupation requiring an advanced level of training, knowledge, or skill

contract

an agreement between two or more parties enforceable by law

Elements of a Legal Contract

1. Agreement — offer and acceptance;

2. Consideration;

3. Competent parties; and

4. Legal purpose.

offer

the applicant usually makes the _____ when submitting the application

Acceptance

takes place when an insurer’s underwriter approves the application and issues a policy

consideration

binding force in any contract

is something of value that each party gives to the other

Know This

Insurer's consideration is the promise to pay for losses; insured's consideration is the payment of premium and statements on the application.

parties to a contract

must be capable of entering into a contract in the eyes of the law

ex. be of legal age, mentally competent to understand the contract, and not under the influence of drugs or alcohol

Legal Purpose

not against public policy

contract of adhesion

is prepared by one of the parties (insurer) and accepted or rejected by the other party (insured)

Insurance policies are not drawn up through negotiations, and an insured has little to say about its provisions

aleatory

there is an exchange of unequal amounts or values

-The premium paid by the insured is small in relation to the amount that will be paid by the insurer in the event of loss.

unilateral contract

only one of the parties to the contract is legally bound to do anything

conditional contract

requires that certain conditions must be met by the policyowner and the company in order for the contract to be executed, and before each party fulfills its obligations

personal contract

between the insurance company and an individual. Because the company has a right to decide with whom it will and will not do business, the insured cannot be changed to someone else without the written consent of the insurer, nor can the owner transfer the contract to another person without the insurer's approval

Life insurance is an exception to this rule: A policyowner can transfer (or assign) ownership to another person. However, the insurer must still be notified in writing.

favor of the insured

Because only the insurance company has the right to draw up a contract, and the insured has to adhere to the contract as issued, the courts have held that any ambiguity in the contract should be interpreted _________

Reasonable Expectations

not always practical or necessary to state every direct and indirect provision or coverage offered by an insurance policy. If an agent implies through advertising, sales literature or statements that these provisions exist, an insured could

Indemnity(reimbursement)

is a provision in an insurance policy that states that in the event of loss, an insured or a beneficiary is permitted to collect only to the extent of the financial loss, and is not allowed to gain financially because of the existence of an insurance contract

utmost good faith

implies that there will be no fraud, misrepresentation or concealment between the parties

Representations

statements believed to be true to the best of one's knowledge, but they are not guaranteed to be true

misrepresentations

Untrue statements on the application are considered _______ and could void the contract

warranty

an absolutely true statement upon which the validity of the insurance policy depends