Chapter 1: Basic Principles of Insurance Flashcards
What is Insurance?
The transfer of risk from one party to another through a legal contract.
Also, the transfer of risk through the pooling or accumulation of funds.
What does indemnify mean?
Policies restore insureds to the financial position they enjoyed before the insured loss.
Insurer
Person providing the coverage
Insured
Person who is covered
What is social insurance?
Insurance programs provided by federal and state governments.
Examples include
*Social Security
*Medicare
*Medicaid
*Serviceman’s Group Life Insurance and Veteran’s Group Life Insurance
*National Flood Insurance Program
*Federal Crop Insurance Corporation
Stock Insurance Company:
Who owns it?
Do they get the right to vote for BOD?
An insurance company owned by private investors/stock holders. For profit.
Stock companies look to grow their post-tax earnings (earned surplus) not paid out in stock dividends. Earnings retained are considered equity, that are owned by shareholders.
Nonparticipating Insurance Policies:
Who owns it?
Do they get the right to vote for BOD?
Nonparticipating Insurance Policies do not pay policy dividends because policyowners do not own the insurance company. Cannot elect company’s board of directors.
Mutual insurance companies:
Who owns it?
Do they have the right to vote for BOD?
The owners are the policy holders.
Purchasers are both the customer and owner.
Does have the right to vote for board of directors.
What is another name for a Mutual Insurer?
“Participating companies” because the policyowners participate in the distribution of dividends.
How do stock insurance companies pay profits versus mutual insurers?
Stock insurers use profits to pay stock dividends to shareholders
Vs
Mutual insurers hold such earnings as a divisible surplus which they return to their policyowners. They do this by issuing participating policies that pay policy dividends.
Divisible surplus
Amount of earnings paid to policyowners as dividends after the insurance company sets aside funds required to cover reserves, operating expenses, and general business expenses.
A partial refund of premiums remaining.
Typically distributed to policyowners on an annual basis.
Mutualization
When a stock company is converted into a mutual company.
Mixed Plan
Rare case of an insurance company issuing both participating and non-participating policies.
Assessment mutual insurers
*Pure assessment mutual company: operates based on loss-sharing by group members. No premium is payable in advance.
*Advance premium assessment mutual: charges a premium at the beginning of the policy period.
Fraternal Benefit Societies
(3 characteristics)
Noted for their social, charitable and benevolent activities. They are based on religion, nationality and/or ethnicity.
Fraternal benefit societies are more concerned about maintaining minimum reserves and surpluses for coverages instead of providing dividends or profits.
3 characteristics:
*It must be a nonprofit
*It must have a lodge system that includes ritualistic work and maintains a representative government form with elected officers.
*Must exist for reasons other than obtaining insurance
Reciprocal Insurers
An unincorporated community organization overseen by a board of governors or directors in which individual members/subscribers agree to insure one another. Policies do not transfer these risks to separate corporate entities.
*Do not received dividends
*Do receive their share of surplus capital if they terminate their membership
*An attorney-in-fact handles transactions for the reciprocal insurer and is authorized to conduct the day-to-day affairs of the insurer on behalf of the subscribers.
Risk Retention Group
A specialized insurance company created under the Federal Liability Risk Retention Act (LRRA) of 1986.
Provides liability insurance for individuals and entities with a common bond.
Participating professionals and organizations in the same business, become policyholders.
Only licensed in the state of domicile but can insure other members throughout the USA.
Risk Purchasing Groups (RPGS)
*Operates under the Federal Liability Risk Retention Act (LRRA) of 1986.
*Provide liability insurance for people with the same bond
*Purchase insurance from an insurance company (they do not insure themselves).
*RPG becomes the master policyholder and the members receive certificates of insurance.
Reinsurer
Insurance for other insurers. The insurance company transfers a portion of an assumed risk to another insurer.
*Primary insurer: the insurance company that transfers some or all of its loss exposure to another insurer
Primary Insurer
The insurance company that transfers some or all of its loss exposure to another insurer
Ceding Company vs Assuming Company
- Ceding Company: the insurance company that transfers risk.
*Assuming Company: the company assuming the risk.
Treaty reinsurance
An automatic sharing of the risks assumed based on previously established criteria.
Facultative reinsurance
A primary insurer seeks reinsurance tailored to cover a specific risk or exposure without an ongoing agreement.
