Insurance Licensing Chapter 1 Flashcards
(130 cards)
1
Q
Transfer the risk
A
When a consumer purchases insurance they transfer risk of loss to an insurance company (carrier).
2
Q
What is a pure risk?
A
one that will result in either a loss or no change status and there is no possibility for gain.
3
Q
Speculative risk
A
may result in a loss, gain, or no change in status.
4
Q
loss
A
reduction, decrease ,or disappearance in value that affects someone’s property or financial position. A loss is the basis for a claim under an insurance contract.
5
Q
Exposure
A
Exposure, or loss exposure, is the condition of being at risk for a loss, whether or not an actual loss occurs. People and property are at risk of loss purely by existing.
6
Q
Peril
A
is the cause of loss.Fire, lightning, wind, death, and disability are common perils covered by various insurance policies
Fire
lightning
hail theft
7
Q
Hazard
A
is a specific condition that increases the probability or likelihood that a loss will occur from a peril. Three types of hazards:physical,moral,and morale includes
icy parking lot
Arson
smoking
bungee jumping
8
Q
Physical hazard
A
A physical condition that increases the probablility of loss.Physical hazards may often be seen, heard, felt, tasted, or smelled.
Examples: Flammable material stored near a furnace or an icy sidewalk
9
Q
Moral hazard
A
Dishonest tendencies that increase the probability of a loss, including certain characteristics and behaviors of people. Moral hazards are most closely related to some form of lying, cheating, or stealing. Moral hazards are intentional, so these losses are not covered.
Examples: An insured burns down their own house or fakes an injury to collect the insurance payout.
10
Q
Morale Hazard
A
An attitude of indifference toward the risk of loss that increases the probability of a loss occurring.
Example: The driver of a car stops at a convenience store to pick up a few items and leaves the car unlocked with the key in the ignition. This action increases the probability that the car may be stolen.
11
Q
Risk sharing
A
means distributing or pooling a risk among several risk-takers with similar loss exposures who agree to cover each other for their losses. Risk sharing reduces the severity of the loss for any one party.
12
Q
Risk Transfer
A
involves shifting a risk to another party. Obtaining an insurance policy, the most common means of managing risk, is an example of risk transfer because the policy makes the insurer responsible for paying covered losses.
13
Q
Risk Avoidance
A
is the elimination of risk by not participating in activities that involve a chance of loss. Never operating a motor vehicle or not owning a car eliminates the risk of being at fault for an auto accident, but avoiding risks may also eliminate the possibility of enjoying life’s advantages. Avoidance is not always an effective method of managing risk, in which case other methods must be used.
14
Q
Risk Reduction
A
involves minimizing the risks we cannot completely avoid. For example, installing fire sprinklers may reduce damage in the event of a fire. Reduction is usually not a complete solution to most risks, however, since it cannot completely account for the element of chance.
15
Q
Risk Retention
A
means maintaining responsibility for a loss, like with self-insurance, whereby an organization sets aside funds to pay potential losses
16
Q
Insurable Risks
A
There must be a large number of homogeneous (like) units with comparable exposures to help accurately predict future lossesThe chance of loss must be statistically calculable, and the premium must be affordable for the consumer
The loss must be uncertain, accidental, and due to chance
The loss must be measurable, meaning it is definite and verifiable in terms of amount, cause, place, and time
The loss must cause a financial hardship
17
Q
Law of large numbers
A
The law of large numbers is a probability theory stating that the larger the number (sample size) of units with the same or similar exposures, the greater the accuracy in predicting losses. This helps the insurer determine the premium it needs to charge to cover the number of predictable losses. A large number of units with the same or similar exposures is referred to as homogeneous units.
18
Q
Adverse Selection
A
is the principle that people will seek insurance more frequently for risks that are hard to insure. This is because there is a higher probability that these losses will occur and they may occur more frequently, compared to average risks that have a lower probability of loss. This creates an imbalance, since insurance companies aim to spread out the high risks with the average risks.
19
Q
Reinsurance
A
Essentially, reinsurance can be thought of as insurance for insurers. It is a device used by insurers to spread their risk and limit the loss they will face in the event of a large claim or catastrophic loss, which helps stabilize profits, increase the insurer’s ability to underwrite risks, and build confidence with consumers and investors. At least two insurers are involved: the primary or ceding insurer, which is the insurance company that transfers the risk, and the reinsurer, which is the insurance company that accepts the transfer and shares the risk.
20
Q
If an insurance company wants to transfer all or part of the risk it has accepted, it would buy which of the following types of insurance?
A
Reinsurance
21
Q
Treaty reinsurance
A
enables an insurer to cede an entire class of risks automatically to a reinsurer, such as ceding all of its Homeowners contracts
22
Q
Facultative reinsurance
A
enables the ceding insurer and reinsurer to negotiate coverage in order to transfer a single risk, allowing the reinsurer to accept or reject individual risks at its discretion
23
Q
Residual Market
A
Those with higher risks that are rejected by the voluntary market may be eligible for coverage through residual markets, which are last-resort coverage sources. Residual markets often exist to provide basic property insurance on real property, state-required personal auto liability coverage, or Workers’ Compensation coverage.
24
Q
Private Insurer
A
carriers are non-governmental entities and typically write insurance on a for-profit basis
25
Government Insurer
Examples of government insurance are the Social Security and Medicare programs, the National Flood Insurance Program (NFIP), Federal Crop insurance, and Terrorism Risk insurance.
26
Stock Insurance Company
A stock company is owned by its stockholders, or shareholders. The stockholders elect a board of directors to manage the company and the board then elects officers to handle the day-to-day activities. Stockholders share in the company’s profits and may receive taxable corporate dividends when and if declared by the directors, though dividends are not guaranteed. Traditionally, stock insurers issue nonparticipating policies, since the policyholders are not entitled to dividends.
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Mutual Insurance Company
A mutual company is owned by policyholders, who may be referred to as members. A board of directors is elected by the members to manages the company, and officers elected by the board handle the day-to-day operations. When and if declared by the board, members may receive non-taxable dividends as a return of any divisible surplus. These dividends are not guaranteed and are considered a return of premium based on any surplus at the end of the year once all claims and operating expenses have been paid. Because policyholders may receive dividends, mutual insurers typically issue participating policies.
28
Which type of insurer is owned by its policyholders?
Mutual insurance company
29
Fraternal Insurers
Fraternal benefit societies are primarily social organizations that engage in charitable and benevolent activities that provide primarily life insurance to its members. They are usually organized on a nonprofit basis. Membership is typically drawn from members of a given religious denomination or lodge, order, or society, and that membership is a requirement to participate.
30
Reciprocal Insurance Company
A reciprocal insurance company is an unincorporated, group-owned insurer whose main activity is risk sharing. It is an aggregation of individuals, firms, businesses, and corporations that exchange insurance on one another’s risks. Each member is known as a subscriber, and each subscriber assumes a part of the risk of all other subscribers. The exchange of insurance is effected through an attorney-in-fact. If premiums collected are insufficient to pay losses, an assessment of additional premium can be made.
31
Risk Retention Groups (RRGs)
A risk retention group is a corporation whose primary activity consists of assuming and spreading the liability exposure of its group members. Membership is limited to risks with similar liability exposures through a common business, trade, product, service, premises, or operation. Risk retention groups are licensed as a liability insurance company under the laws of a particular state and may insure members of the group in any other state. Each member assumes a portion of risk. A risk retention group is managed by an attorney-in-fact.
Examples include groups associated with amusement or theme parks, go-karts, and waterslides, as well as medical and dental professionals, engineers, and accountants.
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Risk Purchasing Groups
A risk purchasing group purchases liability insurance only for its group members and only to cover similar or related liability exposures. A risk purchasing group is different from a risk retention group in that a purchasing group does not assume its own risks like an RRG. Instead, the purchasing group purchases insurance from an insurer or a risk retention group, which assumes the risk.
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Lloyd’s Associations
Technically, Lloyd’s associations are not insurance companies. Instead, they are composed of groups of underwriters, each of which specializes in insuring a particular type of risk, and brokers to form syndicates, which will then offer coverage for higher than average risks. Participants are individually liable only for the risks they assume.
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Syndicates are groups of underwriters and brokers that form:
Lloyd's associations
35
Self-Insurers
Groups and associations with specific underwriting needs may find self-insuring against loss more cost effective than paying premiums for insurance. Larger employers with stable cash flows may choose to self-fund some of their group insurance needs, or for their workers who may be entitled to Workers’ Compensation benefits.
36
Captive Insurance Company
A captive insurance company, also called a captive, is a form of self-insurance where large corporations create their own insurance entity that is owned and controlled by the parent corporation. In other words, the insurer is owned and controlled by its insureds. Most Fortune 500 companies utilize captives.There are financial benefits to creating captives, such as certain tax advantages, but these companies will have additional administrative, overhead, and personnel costs.
State laws dictate how captives may be formed. Captives are commonly allowed to be incorporated as a stock insurer, mutual insurer, reciprocal insurer, nonprofit corporation, or limited liability company (LLC).
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Insurer Domicile
Domicile refers to the jurisdiction (state, district, territory, or country) where an insurer is formed or incorporated. There are three kinds of insurer domiciles: domestic, foreign, and alien.
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Domestic Insurer
An insurer organized under the laws of this state, whether or not it is admitted to do business in this state.
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Foreign Insurer
An insurer not organized under the laws of this state, but in one of the other states or jurisdictions within the United States, whether or not it is admitted to do business in the state or jurisdiction.
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Alien Insurer
An insurer organized under the laws of any jurisdiction outside of the United States, whether or not it is admitted to do business in this state. In the state of Kansas, an insurer organized under Kansas law would be a domestic insurer, an insurer organized under Missouri law would be a foreign insurer, and an insurer organized under Canadian law would be an alien insurer.
41
An insurance company that is organized under the laws of a different state within the United States is known as
Foreign Insurer
42
Insurer Admittance
An admitted, or authorized, insurer is authorized to transact insurance in a given state, and will be granted a certificate of authority from that state’s department of insurance. Admitted insurers may be domestic, foreign, or alien insurers.
43
Non-admitted (Unauthorized) Insurers
A non-admitted insurer is not authorized to transact insurance in a given state, either by failing to comply with state requirements or by not seeking admission. Generally, non-admitted insurers cannot do business on risks located in a given state.
44
example of non admitted insurer
surplus lines insurer, which can insure risks in states it is not admitted in when coverage cannot be obtained from admitted insurers, usually because the risk is too great or too difficult to underwrite. Surplus lines insurance is transacted through licensed surplus lines brokers, and each state regulates the procurement of surplus lines insurance.
45
Insurer Management
The Actuarial Department gathers and interprets statistical information to determine the probability of a loss. This information is used to determine premium rates used by the insurer. A rate is the dollar amount charged for a particular unit of insurance, such as $5 per $1,000 of insurance coverage. The rates established by actuaries are kept in the insurer’s rating manuals.
46
Underwriting Department
is responsible for selecting risks and selecting the specific rate that applies to those risks in order to determine the actual policy premium for an applicant. The premium is the total cost for the amount of insurance purchased by an insured.
47
Which insurance company department selects the risks that the insurance company will insure?
Underwriting
48
Underwriting
The underwriter’s primary responsibility is the selection of risks (persons or property) to be insured. Importantly, underwriting protects the insurer against adverse selection, as underwriters can identify risks that are more likely than average to suffer losses. In other words, the goal of the underwriter is to select risks whose future losses fall into the normal range of expected losses. Ideally, underwriters want to balance the number of insureds in different risk classifications: too many low-risk clients and the insurer may not generate enough profits, and too many high-risk clients may cause the insurer to pay more claims than it is able to pay.
To select risks, underwriters check for insurability, meaning the applicant is able to meet the insurer’s underwriting requirements. The producer is the field underwriter who makes an initial decision about an applicant’s ability to meet those requirements, and line and staff underwriters are employed by the insurer to evaluate applications and manage the risk-selection process.
The underwriter determines the classification of the risk and, if accepted by an insurer, the risk’s premium rate.
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Underwriting Factors
The insurance application is the primary source of information about the purchaser needed for the insurer to underwrite a risk, and it will become part of the insurance contract. When evaluating a risk, underwriters also examine:
The nature of the risk
What hazards are present
The applicant’s claim history
Other factors that may affect the type of risk being insured
Depending on the insurance being applied for, property and casualty underwriters may also take the following information into account:
Construction, including the materials used to construct the building, the age and location of the building, and the quality of the systems within the building
Occupancy of the building, meaning who occupies it and how it is used
Protection available for the building, such as the presence of fire sprinklers
Exposures around the building, such as unfenced swimming pools or environmental risks
Driving record and traffic violations based on motor vehicle reports
Credit-based insurance score, using credit information obtained through consumer reports. Some states limit or prohibit the use of credit scores when underwriting risks.
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Property underwriters may use all of the following factors to evaluate a risk, except:
Martial status
51
Premium Assumptions
An adequate premium must be charged for the risk based on the same factors used in evaluating the risk. Premiums are calculated based on the appropriate rate selected by the underwriter.
Since insurers cannot know in advance the actual costs of providing insurance, underwriting allows the insurer to gather information about applicants to make educated estimates of costs and compare that to the insurer’s ability to pay those costs. Premium rates are considered inadequate when they do not cover projected losses and expenses, and rates must not be excessive or unfairly discriminatory.
52
Educated estimates
Since insurers cannot know in advance the actual costs of providing insurance, underwriting allows the insurer to gather information about applicants to make educated estimates of costs and compare that to the insurer’s ability to pay those costs. Premium rates are considered inadequate when they do not cover projected losses and expenses, and rates must not be excessive or unfairly discriminatory.
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Rating componets
Loss Cost -The loss cost, also known as the pure premium, is the cost of claims paid for a certain kind of risk. The loss cost only accounts for claim amounts and does not include overhead costs or profits.
Expense Load -Actuaries also consider the expense load, which is the total of the expenses associated with handling claims and operating the business. These expenses may include administrative costs, sales commissions, marketing expenses, and overhe
Profit Factor -The profit factor is an estimate insurers use to ensure the business is profitable. This factor also helps protect the insurer against fraudulent claims.
54
When an actuary determines a rate for a specific class of insureds, they do not take into account the:
Insured's driving record
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Judgment Rating (“A” Rating)
Judgment rating establishes a particular rate for the applicant’s specific risk. The underwriter uses their best judgment about the risk to establish its rate.
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Manual Rating (Class Rating)
For manual rating, rates are contained in a rating manual published by the insurer or in rating manuals published by a rating organization. These rates are organized by categories, or classes, of policyholders with similar exposures and experience. Once the underwriter determines that an applicant can be considered part of a specific class, that class rate is applied to the applicant’s premium determination.Auto insurance often has a manual for rating classifications, containing information on how certain factors change a rate for a specific insured, such as insuring multiple vehicles versus one, or insuring autos driven by young operators without much driving experience. However, risks may still vary drastically from driver to driver, such as a person’s driving habits, in ways that are not easily placed into classification tables, so underwriters may also need to use their best judgment (judgment rating) to help calculate the policy's final rate.
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Individual Rating
Individual rating establishes a rate for a particular policyholder because a large enough pool of similar risks is not available for any other type of rate. Individual rating is primarily used for commercial and specialty risks because of the number of unique variables involved.
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Experience Rating (Merit Rating)
Though most premiums and rates are determined using educated estimations about an insured’s risk and potential losses, merit rating uses the insured’s actual loss history to determine the rate. Experience rating, a type of merit rating, uses the policyholder’s loss history from previous policy periods. For example, an insurer may look at the previous three years of the policyholder’s claims history and adjust the premium based on the frequency of their claims compared to the loss history of similar risks across the industry. Fewer claims than the industry average would result in a more favorable rate, and more claims than the industry average would result in an increased rate.
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In experience rating, the underwriter will:
Use an insured's previous claims history over a certain time period to adjust the policy premium
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Rating Approval
Rates are often regulated to ensure they are not inadequate, excessive, or unfairly discriminatory. The approval method used by an insurer may depend on the line of coverage being written and state law.
File and Use
Rates must be filed with the state insurance regulatory authority (the department of insurance) and may be used as soon as they are filed.
Use and File
The insurance company may change rates immediately, but it must file the new rates with the insurance department within a specified period of time.
Prior Approval
Insurers cannot use rates until they have been approved by the department of insurance, or until a specific time period has expired after the filing.
Sometimes, an insurer may charge an applicant a rate that is higher than the rate approved by the state regulatory authority. Some states may allow the use of a consent to rate form, which allows the higher rate to be used with the applicant’s permission. The applicant must sign the form.
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Mandatory Rates
Some states require that mandatory rates be used for certain lines of insurance. For example, when flood insurance is written by the National Flood Insurance Program (NFIP) under the Federal Emergency Management Agency (FEMA), FEMA has the authority to set premium rates that must be used for NFIP policies.
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Open Competition
A state relies on competition between insurers to produce fair and adequate rates.
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Financial Ratios
Financial ratios are used to measure the profitability of an insurance company. These ratios can help determine the profit factor used in rating to determine if rates need to be increased or decreased, and they can help determine the success of an insurer’s underwriting process.
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Loss Ratio
The loss ratio measures the company’s profitability, specifically regarding paid claims. The ratio takes the sum of the paid claims and related loss adjustment expenses (such as investigation costs), and compares that sum to the total earned premiums over a particular period of time. Low ratios indicate higher profitability and better financial health. Higher ratios may indicate a need for stricter underwriting standards.
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Expense Ratio
The expense ratio focuses on operating expenses, including advertising, payroll, and sales commissions. It is calculated by dividing the total operating expenses by the net written premiums over a particular period of time. Like loss ratios, lower expense ratios indicate higher profitability
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Combined Ratio
The combined ratio measures how much money the insurance company loses and indicates how well policies are underwritten. The combined ratio is calculated by adding the loss ratio and the expense ratio. Lower combined ratios suggest accurate pricing and/or fewer unexpected high claims.
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Reserves
are ways insurers can maintain solvency and prepare for their financial obligations to policyholders by setting aside (reserving) certain amounts. Statutory reserves, for example, are the funds insurers must maintain for future claim payments based on state regulator requirements.
68
Loss reserves
reflect an estimation of possible payments owed to insureds for future claims. For example, reserves can be made on a case-by-case basis when a policyholder is expected to report a claim, on an average value basis based on average settlements for particular claim types, or on a loss ratio basis based on expected losses for a particular class.
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Financial Rating Services
Independent financial rating services evaluate and rate the financial stability of insurers. Financial rating companies assign rating codes (for example, AAA or BBB) to identify the perceived claims-paying ability of an insurance company based on public and nonpublic information. Published ratings are available to the public and are often included in advertising and marketing material.
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Distribution Models
Insurance companies can market or sell policies through producers/agents in an agency system, directly from the insurance company, or by distributing policies through mass marketing
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Exclusive or Captive Agency System
A producer under agreement to represent a single insurer (or a group of insurers with common ownership) is called a captive, or exclusive, agent/producer. Under this model, the insurer retains the right to the business written by the agent. The agent may be paid a salary as an employee or commission as an independent contractor. The insurer may also provide certain services to its exclusive producers, such as office space and clerical support.
72
Direct Writing System
A direct writing distribution system refers to an insurance company that issues and services policies directly through their own employees and not outside agents. This is not an agency system, but the employees are considered captive agents since they only place business through the employing insurance company. The insurance company owns the accounts, and the agent may be paid a salary, salary plus bonus, or commiss
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Independent Agency (American Agency System)
A producer who enters into an agency system with more than one insurer is known as an independent agent/producer. The independent agent has ownership of the business written; pays the cost of office space, clerical support, and marketing; and collects renewal information. Independent agents work as independent contractors and are paid a commission.
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Mass Marketing
Mass marketing is a method of marketing insurance products to large groups of people or targeted audiences, such as the marketing used by the American Association of Retired People (AARP). Mass marketing reduces marketing and underwriting expenses for the insurer.
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Direct Response and Direct Mail
Direct response marketing is the most common method of mass marketing, utilizing direct mail, newspapers, magazines, radio, television, internet sales, websites, and vending machines. Licensed employees or contractors sell insurance policies directly to the public, without needing an insurance producer. The types of products offered through direct response may have limited benefits and lower premiums.
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Law of Agency
The Law of Agency defines the relationship between an insurance company, known as the principal, and a producer operating as its agent. The producer represents the principal and is appointed to transact insurance business on its behalf.
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Which of the following individuals represents the insurance company when selling an insurance policy?
Producer
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Principle
the principal is responsible for the acts of the producer and is the source of the agent/producer’s authority, as stipulated in the agency contract. If the agent/producer exceeds the authority of the contract, they become personally liable for their own actions.
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Insurance agent (Producer )
An insurance agent, also known as a producer, is a person who transacts insurance on behalf of an admitted insurance company. The producer’s acts bind the principal, meaning an act of a producer is the act of the principal. The same applies to premium payments and knowledge: a payment made to the agent is a payment made to the principal, and knowledge of the agent is assumed to be knowledge of the principal. A producer’s duties include soliciting applications, collecting premiums, providing service to clients, and explaining the company’s insurance policies to prospective buyers.
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Express Authority
Express authority is written into the producer’s agency contract. It details specific activity regarding the producer’s ability to transact business on behalf of the principal. An example would be the producer’s authority to solicit, negotiate, and sell insurance contracts on behalf of the principal. The agent may also have the express authority to bind coverage.
Implied Authority
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Implied Authority
Implied authority is not specifically stated in the contract, but is necessary, reasonable, and usual for the producer to perform stated duties. Since not all duties can be spelled out in the contract, incidental duties are assumed by the agent as appropriate to carry out the express authority granted by the principal. An example would be the use of the company logo on business cards or letterhead, implying the agent has authority to represent the principal when finding new clients in the process of soliciting and selling insurance. This also includes accepting applications and collecting premiums.
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Apparent Authority
Apparent authority is created when the producer exceeds the authority expressed in the agency contract. It is authority the public (or a third party) is falsely led to believe the agent has and the principal does nothing to counter the public impression that such authority exists. An example would be the producer’s acceptance of premiums on a lapsed policy.
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Which of the following types of authority does the public assume an agent has, based on the agent's conduct?
Apparent
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Agent’s Responsibilities to the Insurer
Agents are responsible for soliciting, negotiating, selling, and cancelling insurance policies with the insurer. Agents have a duty to only recommend the purchase of policies that are suitable to their clients, and they must report any material facts, which are facts about the applicant that may affect underwriting.
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Fiduciary Duty
A fiduciary is an agent who handles insurer funds in a trust capacity. Certain funds, like premium payments, legally belong to the insurer and must be handled in good faith
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Broker
A broker is a licensed individual or firm who negotiates insurance contracts with insurers on behalf of the insurance applicant. A broker represents the applicant or insured’s interest, not the insurer’s interest, and does not have legal authority to bind coverage with any insurer while acting as a broker. A broker’s license is not available in all states.
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Insurance Regulation at the State Level
Historically in the United States, each state had the right to regulate the business of insurance without being subject to certain federal commerce laws until the Supreme Court ruled that insurance is interstate commerce, making it subject to federal regulations. To resolve the disagreement, the McCarran-Ferguson Act of 1945 (also known as Public Law 15) established that it is in the public’s best interest to regulate insurance on the state level, and the insurance industry is not subject to federal antitrust laws when it is state regulated. This ruling prevents over-regulation.
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National Association of Insurance Commissioners (NAIC)
The National Association of Insurance Commissioners (NAIC) is the regulatory support organization created by, governed by, and consisting of the chief insurance regulators and commissioners from the fifty states, D.C., and five U.S. territories. It provides resources, research, legislative and regulatory recommendations, and interpretations for state insurance regulators. Members may accept or reject recommendations. The NAIC has no legal authority to enact or enforce insurance laws, and its primary goal is to promote state uniformity.
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Insurance Services Office (ISO)
The Insurance Services Office (ISO) develops standard insurance forms. ISO serves insurers by providing research and documented information, on which insurers may base its coverages.
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Federal Regulations
On a federal level, Congress created federal agencies to provide regulatory oversight impacting insurance practices. The business of insurance is also subject to a number of federal laws interested in protecting consumer privacy and protecting consumers from unfair business practices.
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Fair Credit Reporting Act (15 USC 1681–1681d)
The Fair Credit Reporting Act protects the consumer’s right to the privacy of credit and financial information, ensuring that all collected data is confidential, accurate, relevant, and properly used for a specific purpose. It also ensures that the public is protected from overly intrusive information collection practices. The act is enforced by the Federal Trade Commission (FTC) and the Consumer Financial Protection Bureau (CFPB).
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Which federal regulation protects consumer privacy?
Fair Credit Reporting Act
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Adverse Actions and Disputes
Any adverse action taken by the insurance company is not finalized until the investigation is complete. For example, if a policy is nonrenewed because of information in the report, and the policyholder disputes the information, the insurer must keep the policy in force until the investigation is finished.
Identity Theft and Fraud Alerts
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Identity Theft
Identify theft can have devastating effects on a consumer’s credit report, and for that reason, the act has procedures in place to respond to reports of fraud. If a consumer or their representative reports in good faith that they are a victim of fraud, the consumer reporting agency must include a fraud alert in the consumer’s file for at least 90 days, unless the consumer requests the alert be taken off the file sooner. The agency must disclose that the consumer may request a free copy of that file. Upon proper verification of the consumer’s identity, the agency must block the reporting of any information the consumer identifies as fraudulent within 4 business days of the request.
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Gramm-Leach-Bliley Act of 1999
The Gramm-Leach-Bliley Act of 1999 provided for two major changes to the financial services industries. First, it repealed parts of the Glass-Steagall Act of 1933 to allow the merger of banks, securities companies, and insurance companies. Second, it established the Financial Privacy Rule and Safeguards Rule to protect consumers’ privacy. The purpose of the GLBA is to ensure the confidentiality of consumer information and protect that information from security threats.
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Financial Privacy Rule
The GLBA requires financial institutions—including insurers—to notify consumers of information-sharing practices when the institution discloses consumers’ nonpublic personal information to nonaffiliated third parties. Notice must be provided at the time the customer relationship is established and annually thereafter, either in writing or electronically with the consumer’s permission. The notice must explain:
The information collected about the consumer
Where that information is shared
How that information is used
How that information is protected
The consumers’ right to opt out of information sharing at any time
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Safeguards Rule
Financial institutions must develop a written information security plan that describes the processes and procedures for protecting consumers’ nonpublic personal information, including how it meets encryption and confidentiality requirements and how it protects against reasonably anticipated threats or unauthorized access to consumer data.
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Under the Gramm-Leach-Bliley Act, insurers must notify consumers of their information-sharing practices at the time the customer relationship is established, and another notice must be sent:
Annually
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Telemarketing Sales Rule
The Federal Trade Commission enforces certain laws regarding consumer privacy and telephone fraud through the Telemarketing Sales Rule, which establishes disclosure requirements and contact limitations for telemarketers.
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Do Not Call (DNC) Registry
Telemarketers and sellers are required to search the registry and update their caller list at least once every 31 days. DNC regulations prohibit telemarketers from making calls to a person’s home before 8:00 a.m. or after 9:00 p.m. local time at the consumer’s location.
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CAN-SPAM Act
The CAN-SPAM Act is a federal law that established rules for unsolicited emails, known as spam, that often generate unwanted costs to recipients, may contain content that is unwanted or pornographic, and may mislead the recipient about its content or purpose. The act is administered and enforced by the FTC.Identification – The email must be clearly identified as a solicitation or advertisement for products or services
Opt-Out – The email must provide easily accessible, legitimate, and free ways for the recipient to unsubscribe from the sender
Return Address – The email must contain a legitimate return email address and a legitimate postal address for the sender.Penalties for violation of the CAN-SPAM Act include actual damages or civil fines of up to $16,000 per electronic mail violation, with no maximum penalty for the sum of all violations. Violators who commit fraud-related acts may also be subject to imprisonment of 1–5 years.
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Terrorism Risk Insurance Act (TRIA)
Terrorism is often an excluded peril on property and casualty insurance policies because the losses could prove to be too catastrophic for private insurers to underwrite coverage or because the inclusion of terrorism coverage would make policy premiums unaffordable for consumers. This uninsurability makes government assistance necessary.
The Terrorism Risk Insurance Act (TRIA) was enacted in direct response to the terrorist attacks on September 11, 2001. The act created a reinsurance facility allowing the federal government to share in losses with private insurers in the event a certified act of terrorism took place. TRIA protects consumers by addressing market disruptions and ensuring continued widespread availability and affordability of commercial property and casualty insurance for terrorism risk.
TRIA is a temporary program that has been extended by a number of reauthorization acts. The program is set to expire December 31, 2027.
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Insurance Limits
The program has a trigger applying to certified acts of terrorism. In 2015, this trigger was insurance losses exceeding $100 million, and this amount increases incrementally by $20 million per year until reaching $200 million in 2020 (meaning the trigger amount for any year after 2020 is also $200 million). Private insurers and the government will share losses greater than the coverage trigger and less than the program cap, which is $100 billion.
The insurer deductible is 20% of all covered losses. Once the deductible is met, the insurance companies have a coshare, or share of the loss. This coshare amount started at 15% in 2015, meaning the government paid for 85% of covered losses, and incrementally increased until reaching 20% in 2020 (and thereafter), meaning the government pays for 80% of covered losses.
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The Terrorism Risk Insurance Act allowed the establishment of the Terrorism Risk Insurance Program, which is administered by:
The Secretary of the Treasury
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USA PATRIOT Act
The USA PATRIOT Act is intended to deter currency smuggling, money laundering, and the financing of terrorism. It amends the Bank Secrecy Act in order to impose recordkeeping and government reporting requirements on banks, financial institutions, and non-financial businesses for specific financial transactions and customer financial records.
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Fraud and False Statements (18 USC 1033–1034)
Congress adopted legislation to penalize fraud and false statements in any matter within the jurisdiction of the federal government, including the insurance industry. Anyone engaged in the business of insurance whose activities affect interstate commerce and who intentionally makes fraudulent material misstatements, or who omits true statements on any financial report or document presented to an insurance professional with the intent to deceive, will have committed a federal unfair and deceptive practice and be in violation of federal law. This includes any of the following acts:U.S. territories include Guam and the Northern Mariana Islands.
Criminal penalties for committing any of these acts include a fine, imprisonment, or both. Generally, imprisonment cannot exceed 10 years, except that:
If the amount embezzled or misappropriated does not exceed $5,000, the person may be subject to imprisonment for up to 1 year
If the prohibited activity jeopardizes the security of an insurer, the person may be subject to imprisonment for up to 15 years
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J works in the insurance industry to transact interstate commerce. If J is found guilty of committing a federal unfair and deceptive practice, such as willful embezzlement, J would be subject to which of the following penalties?
Fine and imprisonment
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Violent Crime Control and Law Enforcement Act of 1994 – Prohibited Persons
Any person engaging in prohibited activities, such as a federal unfair and deceptive practice or transacting insurance without the necessary 1033 waiver, may also be subject to civil penalties of not more than $50,000, or the amount of compensation the person received as a result of the prohibited conduct, whichever is greater. The U.S. Attorney General is authorized to bring the necessary civil or criminal penalties against offenders of the act.
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Fair Credit Reporting Act (15 USC 1881–1681d)
This law protects consumer's right to privacy regarding their credit and financial information by allowing consumers to dispute the accuracy of consumer credit reports when those reports result in adverse action taken by insurers.
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Gramm-Leach-Bliley Act (GLBA)
This law requires financial institutions to notify consumers about the institution's practices when sharing consumers' nonpublic personal information to nonaffiliated third parties. The financial institutions must also develop and put into action an information security plan.
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Telemarketing Sales Rule
This law, enforced by the Federal Trade Commission, protects consumer privacy by establishing the Do Not Call Registry, which allows consumers to opt out of unsolicited sales calls.
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CAN-SPAM Act
This law, enforced by the Federal Trade Commission, protects consumer privacy by allowing consumers to opt out of unwanted commercial emails. It also sets rules for commercial emails, such as providing identification and a legitimate return address.
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Terrorism Risk Insurance Act (TRIA)
This law establishes a reinsurance facility allowing the federal government to provide assistance in the event that an act of terrorism leads to catastrophic losses. This program helps keep property and casualty insurance affordable, and helps ensure insurer solvency.
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USA PATRIOT Act
This law establishes recordkeeping and reporting requirements on financial institutions in order to deter money laundering and the financing of terrorism.
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Fraud and False Statements (18 USC 1033–1034)
This law, applicable to anyone engaged in interstate commerce, establishes penalties for certain federal unfair and deceptive practices, like willful embezzlement of moneys and false entries in financial records. This law also requires that anyone who has committed a felony involving dishonesty or breach of trust must obtain a consent waiver to be employed in the insurance industry.
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A producer for Insurer ABC threatens a competing insurer in order to keep them from doing business. The producer is subject to a fine and possible imprisonment for up to a maximum of:
15 years
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When underwriters select risks, their goal is to:
Estimate a normal range of losses for the risk classification, and select risks that will meet those expectations
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After comparing the cost of paid claims and related expenses to the total earned premiums for the previous year, an insurer determined that it needed stricter underwriting to increase profitability. This was determined by calculating a:
loss ratio
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Self-insurance is an example of which of the following types of risk management?
Retaining the risk
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Which of the following is a physical hazard?
Uneven pavement in a sidewalk
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When done intentionally, all of the following are considered federal unfair and deceptive practices under fraud and false statements legislation, except:
Undergoing interstate commerce in a jurisdiction in which the insurer is not admitted or licensed
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Which type of risk involves the possibility of loss or gain?
Speculative
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Taxable corporate dividends are received by the shareholders of which type of insurer?
Stock Insurer
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Where can you find insurance coverage after being rejected by voluntary market insurers?
Residual market
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Reinsurance is useful for insurers because it does all of the following, except:
Increases premiums for average risks
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Which of the following is correct about a reciprocal insurance company?
Each subscriber assumes a share of the risk of all other subscribers
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What type of insurance is provided by the Terrorism Insurance Program established by TRIA?
Commercial property and casualty
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Which of the following is least likely to be a factor when determining the eligibility of a person for property insurance?
Whether the premium will be paid in full or billed to the insured
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Which of the following is not an element of an insurable risk?
Catastrophic perils
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