General Insurance Flashcards by Steven East

Definition: Manufacture and sell insurance coverage in the form of insurance policies or contracts of insurance

Insurance companies

AKA: Insurers or carriers

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Definition: Are captive or independent organizations that recruit, contract with, train, and support insurance producers

Insurance Agencies

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Definition: Are licensed individuals representing and appointed by an insurance company when transacting insurance business

Insurance Producer

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Definition: is the person or entity that is covered by the Insurer, which covers losses due to loss of life, health, property, or liability

Insured

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Definition: Is not necessarily the insured under the policy but is responsible for paying the policy’s premium and has various rights as specified in the contract

Owner

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Acronym: NAIC

The National Association of Insurance Commissioners

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National Association of Insurance Commissioners (NAIC) bullet points

Consists of all state and territorial insurance commissioners or regulators
provides resource, research, legislative and regulatory recommendations and interpretations for state insurance regulators.
promotes uniformity among states
Members may accept or reject recommendations, NAIC has no legal authority to enact or enforce laws

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Acronym: FIO

Federal Insurance Office

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Federal Insurance Office bullet points

established by the Dodd-Frank Wall Street Reform and Consumer Protection Act
Monitors industry and identifies gaps in the state regulation or insurers
monitors access to affordable insurance in underserved communities
FIO is NOT a regulator or supervisor

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Insurance is primarily regulated by the ____ Level

State

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List the process of Insurance Regulation at the State Level

Legislative branch writes and passes state insurance law.
Judicial branch interprets and determines the constitutionality of statute
State Executive branch enforces the statute
The Commissioner, Director, or Superintendent of Insurance is appointed by the Governor, and the Commissioner has the power to issue rules and regulations to help enforce these statutes.

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US -vs- South-Eastern Underwriters (1944)

The McCarran-Ferguson Act of 1945

Supreme court decision that established the federal government will not regulate the business of insurance in areas which the states have historically had the authority to do so un less the states fail to cooperate.
Congress created federal agencies to provide regulatory oversight impacting insurance practices

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A stock company is owned by ________ or ________. Directors and officers, which are elected ________, put in place a management team to carry out the company’s mission.

Stockholders or Shareholders

*Stockholders are not guaranteed dividends

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A mutual company is owned by ________ (who may be referred to as members). A Board of Trustees or Directors is elected by _______. The directors and officers put in place a management team to carry out the company’s mission.

Policyholders

Policyholders are traditionally entitled to dividends, but it is not guaranteed

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A reciprocal insurance company is a _______ insurer whose main activity is risk sharing. A reciprocal insurer is unincorporated, and is formed by individuals, firms, and business corporations that exchange insurance on one another. Each member is known as a _____, and each one assumes a part of the risk together.

Group-owned

Subscribers

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Lloyd’s of London is NOT an insurance company, but consists of groups of underwriters called _________, each of which specializes in insuring a particular type of risk. Lloyd’s provides a meeting place and clerical services for members who actually transact the business of insurance.

Syndicates

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Definition: Are primarily social organizations that engage in charitable and benevolent activities that can provide life and health insurance to their members. Membership typically consists of members of a given faith, lodge, order, or society.

Fraternal Benefit Societies

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Definition: Group-owned insurers that primarily assume and spread the liability-related risks of its members. They are owned by their policyholders, and are licensed in at least one state. Membership is limited to risks with similar liability exposures such as theme parks, go-carts tracks, or water slides.

Risk Retention Groups (RRG)

*they must have sufficient liquid assets to meet loss obligations.

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Definition: Assume all of the financial risk faced without transferring the risk to an insurer.

Self-Insurers

*rather than pay premiums, funds are set aside to cover claims. This is generally an option for large companies who may limit their risk by only self-insuring up to a certain dollar amount of risk and then acquiring insurance for dollar amounts in excess of that amount.

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Definition: are a last Private coverage source for businesses and individuals who have been rejected by the voluntary insurance market. Coverage is typically written as Workers’ Compensation, personal auto liability or property insurance on real property.

Residual Markets

*Joint Underwriting Association or Joint Reinsurance Pool,
Risk Sharing Plan

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Definition: Insurance companies that operate to accept all or a portion of the financial risk of loss from the primary (or ‘ceding’) insurance company. The risk of loss is shared with one or more insurance companies. All contractual obligations are on the original (primary) company and the consumers have no direct company with the _________ ______

Reinsurance companies

*Reinsurance is what makes insurance affordable. No single insurance company is exposed to 100% of losses it insures.

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What are the 2 types of Reinsurance Agreements?

Treaty - Reinsurance agreement that automatically accepts all new risks presented by ‘ceding’ insurer (the company seeking or requesting the reinsurance from the reinsurer).

Facultative - Reinsurance agreement that allows the reinsurance company an opportunity to reject coverage for individual risks, or price them higher due to their substandard (higher risk).

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Definition: An insurer organized under the laws of this state, whether or not it is admitted to do business in this state.

Domestic Insurer

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Definition: An insurer organized under the laws of any other state, possession, territory, or the District of Columbia of the United States, whether or not it is admitted to the business in this state.

Foreign Insurer

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Definition: An insurer organized under the laws of any jurisdiction outside the United States, whether or not it is admitted to do business in this state.

Alien Insurer

Definition: refers to whether or not an insurer is approved or authorized to write business in this state

Admitted -vs- Nonadmitted

Definition: is authorized by this States Commissioner of Insurance to do business in this State and had received a Certificate of Authority to do business in this State

Admitted (Authorized) insurer

Definition: has either applied for authorization to do business in this state and was declined or they have not applied. Cannot transact insurance in this State

Non-admitted (unauthorized) insurer

Definition: Oversees the operation of the business

Executives

Definition: gather and interpret statistical information used in rate making.

Actuarial Department *an actuary determines the probability of loss and sets premium rates

Definition: responsible for the selection of risks (persons or property) to insure and rating that determines policy premiums.

Underwriting department

Definition: responsible for advertising an selling

Marketing/Sales Department

Definition: assists the policyholder, insured, or beneficiary in the event of a loss and processes, and pays the amount of the claim in a timely manner, based upon the contractual provisions and the amount insured

Claims department

Definition: agent represents solely one company or group of companies having common ownership. The agent is an employee or a commissioned independent contractor.

Exclusive or Captive Agency System mod. *deals with the insured through an exclusive or captive agent

Definition : producer or agent is an employee of the insurer. The insurer owns the accounts and the agent may be paid a salary, bonus or commission

Direct writing system model

Definition: an agent or agency that enters into selling agreements with more than one insurer. It may represent an unlimited number of insurers. Agency retains ownership of the business written. Paid a commission and covers cost of agency operations

Independent agency model

Definition: agents are recruited, trained and supervised by either a managing employee or General Agent who is contracted with the insurance company

Career Agency System Model

Definition: does not recruit career agents. Sells insurance for carriers it is contracted with and maintains its own office and staff.

Personal Producing General Agent Model

Definition: insurers who sell insurance policies directly to the public with licensed employees or contractors. They utilize mass media, such as newspapers, postal, web, vending machines and Internet.

Direct Mail or Direct Response Company Model

Definition: used to target a specific type of insurance to a large group of individuals, such as AARP. Insurer may benefit by reductions in marketing costs and underwriting expenses may be lower when offering coverage to a limited population. Uses the direct response or direct mail method.

Mass marketing model

Definition: the relationship of a person (called the agent or producer) who acts on behalf of another person, company, or government, known as the principal. The principal is responsible for the acts of the agent, and the agents acts bind the principal. An act of an agent is the act of the principal.

Law of Agency.

Definition: the source of authority from which the producer must abide. They appoint the producer to act on its behalf in transacting the business of insurance. It is responsible for all acts of its producers when a producer is acting within the scope of his/her authority. A producer may be personally liable when his/her actions exceed the authority of his/her contract

Insurer (principal).

Definition: a person or agency appointed by an insurance company to represent it and to sell policies on its behalf.

Producer (agent)

A producer acts with one or more of the following three types of authority:

Express Implied Apparent

Definition: authority that is written into the producers contract.

Express authority

Definition: Authority the public assumes the producer has. An exams would be the business activities of providing quotes, completing applications and accepting premiums on behalf of the insurer.

Implied authority

Definition: authority created when the producer exceeds the authority expressed in the agency contract. This occurs when the insurer takes no action to counter the public impression that such authority exists. An example would be a producers issuance of a binder when, in fact, the producer has not been granted such authority.

Apparent authority

What are the producers responsibilities to the Insurer:

Fiduciary duty to the insurer in all respects. Must keep premiums in separate trust account. No commingling. Must report any material facts that may affect underwriting. Responsible for soliciting, negotiating, selling, and canceling the insurance policies with the insurer. Duty to only recommend the purchase of suitable policies

What are the producers responsibilities to insurance applicant or insured?

Forward premiums to insurer on a timely basis. Seek and gain knowledge of applicants insurance needs. Review and evaluate the applicants current insurance coverage, limits, and risks. Serve the best interests of the applicant or insured, although producers represent the insurer. Recommend coverage that best protects the insured from possible loss and NOT the most profitable coverage from the perspective of the producer. Life and health producers do not issue contracts or binders for life or disability insurance, and should not imply that coverage is in effect simply because a person submits an application and payment for the first premium.

Definition: a licensed individual who negotiates insurance contracts with insurers on behalf of the applicant. They represent the applicants or insurers interests, not the insurer, an does not have legal authority to bind the insurer.

Broker *broker licenses are not applicable in all states.

Definition: protects consumer privacy and protects the public from overly intrusive information collection practices. It ensures data collected is confidential, accurate, relevant, and used for a proper and specific purpose.

Fair Credit Reporting Act

What are a some 'red flags' indicating a breach in the USA PATRIOT Act and Anti Money Laundering? (AML)

Paying for an entire policy up front with cash Early cancellation of the policy, regardless of cancellation fees (surrender charges) The heavy use of third parties for policy transactions Strong reliance on wire or electronic fund transfers to foreign accounts.

Federal laws prohibit the commission of Fraud. Subsequently, each of the states enacted its own _______ __________ _______.

Fraudulent Insurance Act

Definition: requires financial institutions, which include insurers, to provide each consumer with a privacy notice at the time the consumer relationship is established and annually thereafter.

Gramm-Leach-Biley Act (the financial services modernization act of 1999).

The Gramm-Leach-Bliley Act requires the privacy notice to explain:

The information collected about the consumer Where the information is shared How the information is used How that information is protected.

Definition: the Act made it a felony for a person to engage in the business o insurance after being convicted of a state or federal felony crime involving dishonesty or breach of trust.

Violent Crime Control and Law Enforcement Act of 1994

Definition: refers to misrepresentation, untruthful was, falsification.

Dishonest

Definition: is based on fiduciary relationship of parties and the wrongful acts violating the relationship.

Breach of Trust

Definition: fines and possible prison time

Penalties

Definition: if consent is granted by any state, other states must allow the applicant to work in their state as well

Reciprocity

Definition: if conditions of consent are not continually met, the consent may be withdrawn

Consent withdrawal

Applicants who have been convicted of a felony, must apply for __________ in the business of insurance, prior to applying for an insurance license

Consent to Work

Definition: a condition where the chance; likelihood, probability or potential for a loss exists

Risk

Definition: situations where there is a chance for loss, gain, or neither loss or gain to occur. Examples: gambling. Investing, starting a new business.

Speculative risk *speculative risk cannot be insured

Definition: situations where there is no chance for gain; the only outcome is for nothing to occur or for a loss to occur. Examples: damage to property cause by fire or natural disaster, financial loss as a result to injury, illness, or death.

Pure risk *pure risk is the only risk that can be insure.

Definition: reduction, decrease, or disappearance of value. It is the basis of a claim under the terms of an insurance policy.

Loss

Definition: the cause or source of a loss

Peril Examples: fire, windstorm, embezzlement, disease, death

Definition: a specific condition that increases the probability, likelihood, or severity of a loss from a peril.

Hazard

What are the three types of hazards?

Physical hazard Moral hazard Morale hazard

Definition: a physical condition that increases the likelihood or probability of loss. They may be seen, heard, felt, tasted, or smelled.

Physical hazard Examples: flammable material stored near a furnace

Definition: dishonest tendencies that increase the probability is a loss; certain characteristics and behaviors of people. Most are closely related to some form of stealing, cheating and lying.

Moral hazard Example: an insured burns down his/her own house to collect the insurance payout.

Definition: an attitude of indifference toward the risk of loss that increases the probability of a loss occurring

Morale hazard. Example: driving to fast for conditions, not wearing a seat belt

Definition: the condition of being at risk of loss. Simply by existing, property and people are subject to many different risks.

Loss exposure

Definition: an imbalance created when risks that are hard to insure (more prone to losses than the average (standard) risk) are the only risks seeking insurance within a specific marketplace.

Adverse selection *examples: only those living in earthquake-prone areas seek to buy earthquake insurance or those in the poorest of health seeking to acquire life or health insurance. High risks exposures tend to seek or continue insurance at a higher participation rate than the average risk exposures do.

Analyzing exposures that create risk and designing programs to minimize the possibility of a loss. Ways of managing risk:

STARR Sharing - pooling or spreading the risk among a large number of persons or entities Transfer - moving the risk from one party to another, such as from a consumer to an insurance company. Avoidance - elimination of the risk or avoiding the activity that gives rise to the chance of loss Reduction - minimizing the chance of loss, but not preventing the risk (burglar alarm, sprinkler system) Retention - assume the responsibility for loss. Choosing deductibles is a method of risk reduction.

Definition: as the number of units in a group increases, the more likely it is to predict a particular outcome.

Law of large numbers *auto insurance losses are the easiest type to predict due to the large number

From the perspective of the insured, the loss must be _______ in nature. Catastrophic perils are not covered; examples include war, nuclear hazard and illegal operations.

Accidental

True or False: | The insured should never profit from an insured transaction, but be made "whole again."

True

Definition: insured is intended to be stored to the same financial or economic condition that existed prior to the loss, depending on the amount and type of insurance purchased.

Principal of Indemnity

Definition: requires the potential for an insured to suffer financial or economic hardship in the event of a loss, as well as a valid legal purpose for the contract.

Insurance Interest *must exist at the time of application in every enforceable insurance contract

Definition: pertains to the formation and enforcement of contracts.

Contract law

Definition : civil wrongs, they're not crimes or breaches of contract. They result in injuries or harm that constitute the basis of a claim by a third party.

Tort law

Definition: a contractual agreement that transfers the liability of one party to another party; it is used by landlords, contractors, and others as a way to avoid or reduce risk.

Hold harmless agreement

Definition: what a reasonable and prudent policy owner would expect; the reasonable expectations of policy owners are honored by the Courts although the strict terms of the policy may not support these expectations

Reasonable Expectations Doctrine.

Definition: an agreement between two or more parties in which there's is a promise to so something in return for a valuable benefit known as consideration. The parties to each agreement are subject to the specific terms of that agreement, which govern the way it's provisions are carried out.

Contract

In the formation and enforcement of any legal contract, 4 necessary elements must have existed at the time the contract was executed between the parties. They are:

Competent Parties - can't be a minor, mentally incompetent or incapacitated, can't be under the influence of alcohol or drugs Legal Purpose - must be in good faith and not violate public policy Agreement- one party must make and communicate an offer to the other party and the second party must accept that offer. Consideration - something of value is exchanged by each of the parties to the contract; the exchange of money (first premium only) for a promise (the guarantees within the contract).

Definition: the offer made to enter into an insurance contract is most commonly an application, accompanied by an initial premium, and submitted by the applicant.

Offer

Definition: the acceptance of an offer to provide an insurance contract takes place when the insurance applied for, after receiving an initial premium and complete application.

Acceptance.

Definition: pays a specified dollar amount for a loss.

Indemnity contract * example, a hospital indemnity policy may pay $100 per day as stated in the policy.

Definition: a written contract may not be altered without the written consent of both parties.

Parol Evidence Rule

Definition: a contract that pays a stated amount in the event of a loss. A life insurance contract is an example.

Values contract *it has a face value that becomes a death benefit in the event of a loss

Definition: Occurs when a claim is paid by the insurer who has the contract and the right to take legal action against a negligent third party who may have caused the loss.

Subrogation ***life policies have no right of subrogation

Definition: one party writes the contract, without input from the other party. The insurer prepares the contract and presents it to the applicant on a "take it or leave it" basis, without negotiation. Any doubt or ambiguity found in the document is construed in favor of the party that did not write it

Contract of adhesion.

Definition: the exchange of value is unequal. Insured's premium payment is less than the potential benefit to be received in the event of a loss. The insurer's payment in the event of a loss may be much greater, or much less than the insured's premium payment

Aleatory contract

Definition: a contract between the insurance company and an individual. These contracts are specific to the person insured at the time the contract is formed. The owner cannot be changed without consent of the insurance company.

Personal contract * life insurance is NOT a personal contract. A property and casualty insurance contract is personal since it cannot be assigned.

Definition: only one party is legally bound to the contractual obligations after the premium is paid to the insurer. Only the insurer makes a promise of future performance, and only the insurer can be charged with breach of contract. The policy owner can cancel the policy at any time and for any reason. The policy owner is not required to continue paying future premiums.

Unilateral contract

Definition: both parties must perform certain duties and follow rules of conduct to make the contract enforceable. The insurer must pay claims if the insured has complied with all the policy's terms and conditions. Without premiums being paid on time and in full the insurer is not obligated to pay the claim if the policy lapses

Conditional contract

Definition: statements in the application or stipulations in the policy that are guaranteed true in all respects. If warranties are later discovered untrue or breached, coverage is voided.

Warranties

Definition: the willful holding back or secretion of material facts pertinent to the issuance of insurance.

Concealment * may result in denial of coverage and may void the policy.

Definition: intentional deception of the truth in order to induce another to part with something of value or to surrender a legal right

Fraud

What are the 5 elements of Fraud?

- False statement, made intentionally and that pertains to a material fact - disregard for the victim - victim believes the false statement - victim makes a decision and/or acts based on the belief in, or reliance upon, the false statement. - the victims decision and/or action results in harm.

Definition: voluntary surrender of a known right, claim or privilege.

Waiver

Definition: judicial denial of a contractual right based on prior actions contrary to what the contract requires.

Estoppel

What are the 5 underwriting factors?

- Age - Gender - Tobacco use - Medical history and pre existing conditions - hazardous hobbies and occupations

Definition : the dollar amount charged for a particular unit of insurance, such as $5 per $1000 of insurance

Rate

Definition: the total cost for the amount of insurance purchased.

Premium

General Insurance Flashcards

(106 cards)