General Insurance Principles - Insurance Providers

Question 1

Types of Insurers

Answer 1

Private and Government

Question 2

Two Types of Commercial Insurance

Answer 2

Stock and Mutual

Question 3

Stock Insurance Company

Answer 3

Insurance companies owned by stockholders and that may pay taxable dividends to their stockholders. The companies have minimum capital requirements and are governed by a board of directors elected by their stockholders.

Question 4

Mutual Insurance Company

Answer 4

Insurance companies owned by policy holders and that may pay non-taxable dividends to the policy holders. The companies have minimum capital requirements and are governed by a board of directors elected by their stockholders.

Question 5

Demutualization

Answer 5

The process a mutual insurance company goes through to become a stock insurance company.

Question 6

Mutualization

Answer 6

The process a stock insurance company goes through to become a mutual insurance company.

Question 7

Medical Car Service Providers

Answer 7

These organizations blend characteristics of commercial insurance companies and medical care providers.

Question 8

Fraternal Benefit Societies

Answer 8

An organization of people who share a common ethnic, religious, or vocational affiliation. Fraternal benefit societies are entities that

1. ) Have no capital stock;
2. ) Have a representative form of government;
3. ) Exist not for profit but solely for the benefit of their members and their beneficiaries; and
4. ) Operate on a lodge system with a ritualistic form of work.

Fraternal societies may provide insurance to their members. Fraternal insurers are nonprofit organizations that operate under a special section of the insurance laws of the state in which they are approved. They specialize primarily in life insurance and annuity products that are usually available only to the society’s members.

Question 9

Home Service Companies (Industrial Insurance) (Debit Companies)

Answer 9

A stock or mutual company that distributes industrial life insurance.

Question 10

Industrial Life Insurance (Burial Insurance)

Answer 10

Individual life insurance coverage in small face amounts usually less than $10,000 and that require no medial exam to qualify. Typically, the insurance agent meets with the policy owner at home, weekly or monthly, to collect the premium.

Question 11

Reciprocal Insurance Exchanges

Answer 11

An unincorporated group of individuals (called subscribers), working together through an attorney-in-fact, who each agree to pay a pro rata share of any loss suffered by any other member.

Question 12

Lloyd’s Association

Answer 12

An association of individuals and companies that band together to underwrite unique insurance risks on their own accounts. It offers a forum for large companies and brokers to find insurers. A member can be either a person or a company. Members are organized into syndicates, with each syndicate specializing in a particular risk.

Question 13

Risk Retention Group (RRG)

Answer 13

An insurance company that provides self-insurance services to owner-members who all have a business, occupation, or professional relationship with one another.

Question 14

Risk Purchasing Group

Answer 14

A group of persons or entities with similar risks who form an organization for the purpose of buying insurance on a group basis. These persons are usually members of a similar business or trade. Purchasing groups do not make insurance available for the general public; they exist to provide coverage for their members.

Question 15

Surplus (Excess) Lines Insurance

Answer 15

A market for insurance not available from any admitted company within a state. Applicants seeking insurance for a unique risk may turn to a surplus lines broker in their state to find an insurer outside of the state that will provide the desired coverage.

Question 16

Reinsurance

Answer 16

A formal agreement in which both the risk and the premium received by an insurer for insurance policies is shared with one or more other companies. The insurer seeking to transfer some of its risk is known as the ceding company. The insurer accepting some of the risk being transferred is known as the reinsurance company. The ceding company pays a premium to the reinsurer for its coverage. When a reinsured loss occurs, the reinsurer indemnifies the ceding company for its share of the claim.

Question 17

Ceding Company

Answer 17

An insurer seeking to transfer some of its policy risks onto another company.

Question 18

Reinsurance Company

Answer 18

An insurer accepting some of the risk of another insurer’s policies in exchange for a premium.

Question 19

Federal Insurance Programs

Answer 19

1. ) Social Security Insurance (formerly Old-Age, Survivors and Disability Insurance/OASDI);
2. ) Medicare (formerly Supplemental Medical Insurance/SMI);
3. ) Medicaid

Question 20

State Insurance Programs

Answer 20

1. ) Workers’ Compensation
2. ) Unemployment Insurance
3. ) State-run Medical Insurance Plans

Question 21

Admitted Insurer

Answer 21

A company that has received a certificate of authority from a state in which it wants to transact insurance business

Question 22

Certificate of Authority

Answer 22

A document issued by a state that allows the company to transact insurance within the state. It certifies that the company has met the state’s requirements for conducting insurance business. An insurer must be separately admitted in every state in which it transacts business.

Question 23

Non-Admitted Insurer

Answer 23

A company that transacts business in a state for which it does not hold a certificate of authority (i.e., surplus lines insurance).

Question 24

Unauthorized Insurer

Answer 24

A company that is presenting the products it sells as “insurance” when in fact the product is not a valid insurance product (and the company is not a legitimate insurance company).

Question 25

Domestic Insurers

Answer 25

Insurers doing business in the state in which they are domiciled (that is, headquartered).

Question 26

Foreign Insurers

Answer 26

A company that does business in states other than the one in which it is domiciled.

Question 27

Alien Insurers

Answer 27

A company that is incorporated in a country outside the United States and doing business in the United States is classified as an alien company in every state where it is admitted.

Question 28

Insurer Financial Status (Independent Rating Services)

Answer 28

A way to distinguish insurers by evaluating their financial strength and claims-paying ability.

Question 29

Most Common Independent Rating Services

Answer 29

1. ) A.M. Best
2. ) Standard and Poor’s
3. ) Moody’s
4. ) Duff and Phelps

Question 30

Career (Captive) Agency System

Answer 30

Insurance distribution system uses producers who primarily, if not exclusively, represent one insurer.

Question 31

Career (Captive) Managerial System

Answer 31

The insurer employs sales representatives through regional offices, branches, or agencies. The agency head (called a general manager, or GM) is an employee of the insurer. The insurer is responsible for agency expenses and staffing.

Question 32

Career (Captive) General Agency System

Answer 32

The agency head is an independent contractor (called a general agent, or GA) who employs sales representatives. The contractor is responsible for agency expenses and staffing and is not an employee of the insurer.

Question 33

Independent Agency System

Answer 33

The agency is not affiliated with any single insurer and in fact represents multiple companies. Managers of independent agents, sometimes called personal producing general agents (PPGAs), are solely responsible for hiring, dismissing, and managing producers (brokers).

Question 34

Direct Response System

Answer 34

Through mass market advertising such as mail, TV, Internet, or phone, insurers market and sell directly to consumers, without the use of sales representatives.

Question 35

Producer

Answer 35

Common term referring to insurance agents and brokers.

Question 36

Divisible Surplus

Answer 36

Term used to describe the dividends or excess Premiums distributed to policyholders by mutual insurance companies.

Question 37

Participating Policies

Answer 37

Insurance policies issued by mutual insurance companies whose policy owners are eligible to receive dividends.