Insurance companies (known as Insurers or Carriers)
they manufacture and sell insurance coverage in the form of insurance policies or contracts of insurance.
Insurance Agencies
are captive or independent organizations that recruit, contract with, train, and support insurance producers.
Insurance Producers
are licensed individuals representing and appointed by an insurance company when transacting insurance business.
An Insured
is the person or entity that is covered by the Insurer, which covers losses due to loss of life, health, property, or liability.
An Owner
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.
The National Association of Insurance Commissioners (NAIC)
consists of all State and territorial insurance commissioners or regulators. It provides resources, research, legislative and regulatory recommendations and interpretations for state insurance regulators. It also promotes uniformity among states. Members
Federal Insurance Office (FIO)
was established by the Dodd-Frank Wall Street Reform and Consumer Protection Act. This office monitors the insurance industry and identifies issues and gaps in the state regulation of insurers. It also monitors access to affordable insurance by traditiona
Insurance Regulation at the State Level
The insurance industry is regulated primarily at the state level. The legislative branch writes and passes state insurance laws, or statutes, to protect the insuring public. The judicial branch is responsible for interpreting and determining the constitut
Insurance Regulation at the Federal Level
In the aftermath of the Supreme Court decision in U.S. v. South-Eastern Underwriters (1944), the McCarran-Ferguson Act of 1945 established that the federal government will not regulate the business of insurance in areas which the states have historically
Private vs. Government Insurers
Most insurance is written through private insurers. However, there are instances where governmental-based insurers step in to offer an insurance alternative when private insurers are unable to provide protection, usually related to the catastrophic nature
Types of Insurance Companies- Stock Insurance Company
A stock company is owned by stockholders or shareholders. Directors and officers, which are elected by stockholders, put in place a management team to carry out the company's mission.
Stockholders may receive taxable corporate dividends as a share of the
Types of Insurance Companies- Mutual Insurance Company
A mutual company is owned by policyholders (who may be referred to as members). A Board of Trustees or Directors is elected by policyholders. The directors and officers put in place a management team to carry out the company's mission. Policyholders may r
A ______________ insurance company is owned by its policyholders
MUTUAL
Types of Insurance Companies- Reciprocal Insurance Company
A reciprocal insurance company is a group-owned 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 know
Types of Insurance Companies- Lloyd's of London
Lloyd's of London is not an insurance company, but consists of groups of underwriters called Syndicates, each of which specializes in insuring a particular type of risk. Lloyd's provides a meeting place and clerical services for syndicate members who actu
Types of Insurance Companies- Fraternal Benefit Societies
Fraternal benefit societies 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 soc
Types of Insurance Companies- Risk Retention Groups (RRG)
Risk Retention Groups are 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. However, they may insure members of the group in oth
Types of Insurance Companies- Self-Insurers
Self-insurers assume all of the financial risk faced without transferring that risk to an insurer. Rather than paying premiums to a third party the self-insurer sets aside funds in an amount equal to or greater than the expected losses. If the losses are
RESIDUAL MARKETS
Residual markets are a last resort 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 r
A Joint Underwriting Association
Requires insurers writing specific coverage lines in a given state to assume their share of profits/losses of the total voluntary market premiums written in that state.
Risk Sharing Plan
Insurers agree to apportion among themselves those risks that are unable to obtain insurance through normal channels.
RE-INSURANCE COMPANIES
Reinsurance companies are 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 obligati
TYPES OF INSURANCE AGREEMENTS-TREATY
Reinsurance agreement that automatically accepts all new risks presented by the ceding insurer (the company seeking or requesting the reinsurance from the reinsurer)
TYPES OF INSURANCE AGREEMENTS- FACULATIVE
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) nature
FINANCIAL SERVICES AGENCIES
Independent financial rating services evaluate and rate the claims paying ability and financial stability of insurance companies. These firms assign letter ratings that indicate the financial strength of each company which may be based on both public and
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?
REINSURANCE
DOMESTIC INSURER
An insurer organized under the laws of this state, whether or not it is admitted to do business in this state. Example: An insurer incorporated in New York is considered domestic to New York
FOREIGN INSURER
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 do business in this state.
Example: An insurer incorporated in New York is considered foreign
ALIEN INSURER
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.
Example: An insurer incorporated in Ontario, Canada, is considered alien to New York.
ADMITTED VS NON ADMINTED
Refers to whether or not an insurer is approved or authorized to write business in this State.
The domicile does not impact whether an insurer may be admitted to do business in this State.
ADMITTED INSURER ( AUTHORIZED)
insurer is authorized by this State's Commissioner of Insurance to do business in this State and has received a Certificate of Authority to do business in this State.
NON ADMITTED INSURER ( UN AUTHORIZED)
insurer has either applied for authorization to do business in this State and was declined or they have not applied. They do not have a Certificate of Authority to do business in the State.
SURPLUS ( EXCESS LINES) INSURANCE
finds coverage when insurance cannot be obtained from admitted insurers. However, it cannot be utilized solely to receive lower cost coverage than would be available from an admitted carrier.
Each State regulates the procurement of Surplus Lines insurance
Which of the following is an insurance company that is organized under the laws of another state within the United States?
A foreign insurer is not organized under the laws of the state in which it is writing insurance, whereas a domestic insurer is organized under the laws of the state in which it is writing insurance.
Insurer Management and Distribution
Executives - Oversee the operation of the business.
� Actuarial Department - Gather and interpret statistical information used in rate making. An actuary determines the probability of loss and sets premium rates.
� Underwriting Department - Responsible fo
Which insurance company department accepts the insurance risk?
UNDERWRITING-is responsible for evaluating the acceptability of a risk and, once accepted, determines the actual rate to be charged.
Exclusive or Captive Agency System
Deals with the insured through an exclusive or captive agent.
Agent represents solely one company or group of companies having common ownership
Insurer retains ownership rights to the business written by the agent
The agent is an employee or a commissione
DIRECT WRITING SYSTEM
Producer or Agent is an employee of the insurer
Insurer owns the accounts
The agent may be paid a salary, salary+bonus, or commission
INDEPENDENT AGENCY
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
An independent contractor that is paid a commission and covers the cost of
PERSONAL PRODUCING AGENT
Does not recruit career agents.
Sells insurance for carriers it is contracted with and maintains its own office and staff.
Direct Mail or Direct Response Company
Insurers who sell insurance policies directly to the public with licensed employees or contractors
A marketing system utilizing mass media, such as direct mail, newspapers, magazines, radio, television, internet, web sites, call centers and vending machin
MASS MARKETING
Used to target a specific type of insurance to a large group of individuals, such as the American Association of Retired People (AARP)
Insurer may benefit by reductions in marketing costs and underwriting expenses may be lower when offering coverage to a
LAW OF AGENCY
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 agent's acts bind the principal. An act of an
INSURER ( PRINCIPAL)
The Insurer is the source of authority from which the producer must abide. Insurer appoints 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 sc
Which of the following individuals represents the insurance company when selling an insurance policy?
PRODUCER-The producer or agent is licensed to represent the insurance company when transacting insurance business.
PRODUCER
A person or agency appointed by an insurance company to represent it and to sell policies on its behalf. A producer acts with one or more of the following three types of authority:
Express - Authority that is written into the producer's contract. An examp
PRODUCERS RESPONSIBILITIES TO THE INSURER
Fiduciary duty to the insurer in all respects. A fiduciary is a legal or ethical relationship of trust between two or more parties. Typically, a fiduciary prudently takes care of money for another person especially when handling premiums for insurance pol
PRODUCERS RESPONSIBILITIES TO INSURANCE APPLICANT OR INSURED
Forward premiums to insurer on a timely basis
Seek and gain knowledge of the applicant's insurance needs
Review and evaluate the applicant's current insurance coverage, limits, and risks
Serve the best interests of the applicant or insured, although produ
Which of the following type of authority does the public assume an agent has when quoting insurance?
IMPLIED-Implied authority is that which the public assumes the agent has if it is not written into the agent's agency contract.
A producer has each of the following responsibilities to the Insurer, except:
A duty to recommend only high premium policies
The producer is responsible to the insurance applicant to promptly forward premiums to the insurer, recommend the best protection, gain knowledge of the applicant's insurance needs and current insurance cover
BROKER
A licensed individual who negotiates insurance contracts with insurers on behalf of the applicant. A broker represents the applicant or insured's interests, not the insurer, and does not have legal authority to bind the insurer. Broker licenses are not ap
Fair Credit Reporting Act (15 USC 1681-1681d)
The Fair Credit Reporting Act 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.
When an appli
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 acc
Fraud and False Statements (Fraudulent Insurance Act)
A fine of no more than $50,000, imprisonment for up to 10 years, or both
If the violation jeopardized the safety and soundness of an insurer and was a significant cause of the insurer being placed in conservation, rehabilitation, or liquidation by an appr
Gramm-Leach-Bliley Act (the Financial Services Modernization Act of 1999)
The information collected about the consumer
Where that information is shared
How that information is used
How that information is protected
The notice must also identify the consumer's right to opt out of the information being shared with unaffiliated pa
Violent Crime Control and Law Enforcement Act of 1994 (18 USC 1033, 1034)
Dishonesty refers to misrepresentation, untruthfulness, falsification.
Breach of Trust is based on fiduciary relationship of parties and the wrongful acts violating the relationship.
Penalties - Fines and possible prison time.
As it pertains to insurance
RISK
A condition where the chance, likelihood, probability or potential for a loss exists.
MANAGEMENT
The determination of what types of protection are required to meet an insured's needs. Risk may be manageable, but it cannot be eliminated
A survey of the insured's operations, health, and risk exposures that could give rise to losses, including the ident
SPECULATIVE RISK
Situations where there is a chance for loss, gain, or neither loss nor gain to occur. Examples of speculative risk include gambling, investing, starting a new business. Speculative risk cannot be insured.
PURE RISK
Situations where there is no chance for gain; the only outcome is for nothing to occur or for a loss to occur. Pure risk is the only risk that can be insured. Examples include the possibility of:
Damage to property caused by a fire or other natural disast
TYPES OF RISK
Loss - Reduction, decrease, or disappearance of value. A loss is the basis of a claim under the terms of an insurance policy.
Peril - The cause or source of a loss (fire, windstorm, embezzlement, disease, death).
Hazard - A specific condition that increas
Three Types of Hazard- PHYSICAL
A physical condition that increases the likelihood or probability of loss. Physical hazards may be seen, heard, felt, tasted, or smelled.
Example: Flammable material stored near a furnace.
Three Types of Hazard- MORAL
Dishonest tendencies that increase the probability of a loss; certain characteristics and behaviors of people. Moral hazards most closely related to some form of lying, cheating, or stealing.
Example: An insured burns down his/her own house to collect the
Three Types of Hazard- MORALE
An attitude of indifference toward the risk of loss that increases the probability of a loss occurring.
Example: Driving too fast for conditions, not wearing a seat belt, ignoring stop signs at familiar intersections, smoking, failure to take medications
Dishonest tendencies that increase the probability of loss are what types of hazard?
MORAL-A hazard increases the chance of loss and the three types are moral, morale, which is indifference or carelessness, and physical, which is a physical condition.
Types of Risk- LOSS OF EXPOSURE
The condition of being at risk of loss. Simply by existing, property and people are subject to many different risks. To an insurance company, each insured person or their covered property represents the risk of loss and the value of each potential claim i
Types of Risk- ADVERSE SELECTION
An imbalance created when risks that are more prone to losses than the average (standard) risk are the only risks seeking insurance within a specific marketplace. For example, only those living in earthquake-prone areas seek to buy earthquake insurance or
MANAGING RISK
S Sharing
Investments by a large number of people may be pooled by use of a corporation or partnership.
Pooling or spreading the risk among a large number of persons or entities
T Transfer
Transferring the risk from one party to another, such as from a co
INSURABLE RISK MUST INCLUDE
Large number of homogeneous units or groups with the same perils.
Law of Large Numbers - As the number of units in a group increases, the more likely it is to predict a particular outcome.
Auto insurance losses are the easiest type of insurance loss to pr
Each of the following must be included in an insurable risk, except:
Large group with dissimilar members: An insurable risk must also include a large number of groups with the same perils, affordable premiums, and the loss must be measurable.
The Insurance Contract
A legal contract purchased to indemnify the insured against a loss, damage, or liability arising from an unexpected event.
The exchange of a relatively small and definite expense for the risk of loss that, if it occurs, may be large or small.
A contract d
Principal of Indemnity
Insured is intended to be restored to the same financial or economic condition that existed prior to the loss, depending on the amount and type of insurance purchased.
Insured should not profit from an insurance transaction, but be made "whole again
Insurability
The ability of an applicant to meet an insurer's underwriting requirements.
Underwriting
The process of selecting, classifying, and rating a risk for the purpose of issuing or not issuing insurance coverage.
Insurable Events
Any event, past or present, which may cause loss or damage, or create legal liability on the part of an insured.
Insurable Interests
Insurable Interest
All Policies
Insurable interest must exist in every enforceable insurance contract.
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
Indemnity
Which principle of insurance restores the insured to the same economic condition that existed before the loss?
Contracts General Terms
Contract Law Pertains to the formation and enforcement of contracts.
Tort Law Torts are 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.
Hold Harmless Agreemen
Four Elements of a Legal Contract
1. Competent Parties
All parties to a contract (i.e., Insurer and Insured must have legal capacity to enter into a contract).
Those without legal capacity include:
Minors - The insurer may be held responsible for its obligations. However, in most cases a
Insurance Contract General Terms
Indemnity Contract Pays a specified dollar amount as stated in the contract up to the amount of the actual loss. These contracts are considered reimbursement plans
Parol Evidence Rule A written contract may not be altered without the written consent of bo
Characteristics of an Insurance Contract
Contract of Adhesion - One party writes the contract, without input from the other party. One party (insurer) prepares the contract and presents it to the other party (applicant) on a "take-it-or-leave-it" basis, without negotiation. Any doubt or ambiguit
Legal Interpretations Affecting Contracts
Principal of Indemnity - The insured is restored to the same financial or economic condition that existed prior to the loss, depending on the amount and type of insurance purchased. The insured should not profit from an insurance transaction.
Utmost Good
A warranty is defined as which of the following?
Statement in the application that is guaranteed to be true, A warranty is a statement guaranteed true in all respects and if later discovered to be false, the contract may be voided.
Insurer Underwriting
Underwriter
The underwriter's primary responsibilities include the selection of risks by determining insurability. Insurable interest is also established at that time. The underwriter also determines the classification, or type of risk, and premium rating
Each of the following is a factor considered by an underwriter, except:
Marital Status is not an underwriting factor, but the nature of the risk is also considered.
General Insurance � Lightning Facts
1. The State Commissioner, Supervisor, or Director of Insurance is the chief insurance regulator and has the power to issue rules and regulations to enforce state insurance statutes.
2. A stock insurance company issues non-participating policies and is ow