General Insurance

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Geoharding
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29543
Filename:
General Insurance
Updated:
2010-08-10 23:55:56
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Producers Law Agency
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Description:
A relationship between two parties where one (the producer/agent) may act on the behalf of the other (the principal) and bind the actions or words of the principal.
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  1. Actuary
    a person trained in the technical aspects of insurance and related fields, particularly in mathematics and probabilities. Determines the probability of loss and sets the premium rates for the insurer.
  2. Applicant
    the party making application, offering himself/herself or another person to be insured by contract.
  3. Application
    a document that provides information for underwriting purposes. After the policy is issued, any unanswered question is considered waived by the insurer. The application becomes part of the entire contract.
  4. Attained Age
    a person’s age at any point or time (age at policy issue, renewal or conversion).
  5. Controlled Business
    possessing a license solely for the purpose of writing business on one’s own self, immediate family, relatives, employer and employees.
  6. Earned Premium
    that portion of a premium for which protection has already been given.
  7. Effective Date
    the date when insurance coverage begins (may also be known as inception date).
  8. Endorsement
    a form changing the provisions and attached to a policy (also known as a rider).
  9. Executory Contract
    a contract that promises action in the event of a specified future occurrence.
  10. Face Amount
    the death or maturity benefit payable to a beneficiary or policyowner from a life policy. Sometimes referred to as a limit of liability.
  11. Fiduciary
    an agent or broker who handles the insurer’s funds in a trust capacity and submits all premiums promptly.
  12. Insurability
    the ability of an individual to meet an insurer’s underwriting requirements.
  13. Issue Age
    the individual’s actual or closest age on the policy issue date. 14. Lapse – termination of a policy because premium has not been paid by end of thegrace period.
  14. Underwriting
    the process of evaluating a risk for the purpose of issuing insurance coverage.
  15. Valued Contract
    a contract that pays a stated amount in event of a loss (Disability or Life insurance).
  16. Risk Management
    The process of analyzing exposures that create risk and designing programs to minimize the possibility of a loss.
  17. Insurance
    a contract whereby one undertakes to indemnify against loss, damage, or liability arising from a contingent or unknown event.
  18. Insurable Events
    any event, whether past or present, which may cause loss or damage to a person having an insurable interest or create a liability against him/her.
  19. Risk
    a condition in which a chance of loss exists. The two types of risk are...
  20. Risk...2 types
    1) Speculative risks – instances where there is a chance of loss or gain.
  21. Risk...
    2) Pure risk – situations where only the chance of loss and no chance forgain exist.
  22. Loss
    a reduction in, decrease or disappearance of value.
  23. Loss Exposure
    the extent to which one may be affected by a peril.
  24. Peril
    the cause of a possible loss.
  25. Hazard
    • a specific situation that increases the probability of a loss arisingfrom a peril or that may influence the extent of the loss. There are three types of hazards:
    • 1) Physical (tangible characteristics).
    • 2) Moral (dishonesty – giving false information on an application).
    • 3) Morale (indifference – driving without seat belts, smoking, driving too fast, etc.).
  26. Over Insurance
    when more insurance is in force than the insured has the potential to lose. The excess amount will not be paid. Over insurance does not apply to life insurance.
  27. Risk Reduction
    reducing, but not preventing the risk.
  28. Risk Avoidance
    not being involved in the activity that gives rise to thechance of loss.
  29. Risk Retention
    (self-insurance) – retaining the responsibility for the loss.
  30. Risk Transfer
    transferring the risk to another (insurance company).
  31. Risk Sharing
    pooling the risk of a large number of persons (corporation).
  32. Requisites of an Ideally Insurable Risk #1
    1. There must be a large number of homogeneous (like) units to make losses reasonably predictable.
  33. Requisites of an Ideally Insurable Risk #2
    2. The loss must be definite in terms of cause, time, place and amount (calculable).
  34. Requisites of an Ideally Insurable Risk#3
    3. The loss must be accidental.
  35. Requisites of an Ideally Insurable Risk#4
    4. The loss must cause financial hardship.
  36. Requisites of an Ideally Insurable Risk#5
    5. The policy must exclude catastrophic perils, such as war, nuclear hazard andillegal operations.
  37. Principle of Indemnity
    In a property and casualty contract, the insured is restored to the same financial condition as prior to the loss. The insured should not profit from or lose from an insurance transaction.
  38. Law of Large Numbers
    A principle stating that the larger the number of exposures considered, the more closely the losses reported will equal the probability of loss. The probability of loss is more predictable, thus a loss ratio is more readily available. This law is the basis for the statistical expectation of loss and is used by insurers to calculate rates (premiums) and predict losses over a given period of time.
  39. Reinsurance (Risk Sharing)
    A device used by insurers to transfer or share in a risk. This process disperses the probability of a large loss and in turn provides coverage for a possibly otherwise uninsurable risk. There are at least two insurers involved, the insurer originating the application (ceding company) and the company or companies who share in the risk (reinsurance insurers). The agreement of reinsurance is strictly between the two insurance companies and will be classified as either an Automatic or Facultative Agreement.
  40. 1. Automatic Agreements
    the ceding company must transfer the amount of insurance in excess of the retention level immediately and automatically upon receipt of the premium. The transfer is automatic in accordance with the reinsurance agreement.
  41. 2. Facultative Agreements
    allow the ceding insurer and the reinsurance companies an opportunity to exchange advice about the underwriting of each case. This agreement is more time-consuming and may result in a higher premium.

    These agreements are strictly between the insurers; all inquiries and transactions by the consumer regarding the process are through the ceding or originating company.
  42. Adverse Selection
    The insuring of risks which are more prone to losses than the average (standard) risk. These risks tend to seek or continue insurance at a higher participation rate than does an average (standard) or above average (preferred) risk.
  43. Hold Harmless Agreement
    The hold harmless agreement is a contractual agreement removing the liability of one party from a second party. These agreements are used mostly in group health replacements and could be considered as a measure of risk avoidance.
  44. Insurable Interest
    1. Possibility of an economic loss due to sickness or death (business partner, key employee, etc.).
  45. Insurable Interest
    2. No one may purchase an insurance contract without the consent of the insured (the exception would be in the case of a parent purchasing insurance on the life of a minor child).
  46. Insurable Interest
    3. In Life and Health insurance, insurable interest must exist at the time of application (but not necessary at time of loss).
  47. Insurable Interest
    4. The insurable interest on one’s own life is generally regarded as unlimited.
  48. Insurable Interest
    5. Some insurers recognize love and affection as insurable interest, such as grandparent to a grandchild, brothers and sisters, marriage partners, etc. Normally the love and affection insurable interest requirements are not satisfied when trying to insure a mother-in-law, father-in-law, or someone with whom we have a long lasting friendship.
  49. 1. Stock Insurance Company
    • a. A stock company is owned by stockholders (shareholders).
    • b. Stockholders direct the company’s operation by electing directors andofficers.
    • c. Shareholders receive taxable stock dividends (return of profit). d. Traditionally, stock insurers issued nonparticipating policies; however, today,in most jurisdictions, a stock insurer is free to issue participating policies.
  50. Mutual Insurance Company
    • a. A mutual company is owned by its policyholders. Every policyholder is amember of the company.
    • b. Policyholders choose a Board of Trustees or Directors to manage thecompany.
    • c. Profits are returned to policyholders as nontaxable dividends (return ofunused premium).
    • d. Most mutual companies are nonassessable – they cannot charge members apro rata share of loss and expense at the end of the policy period.
    • e. Traditionally, mutual insurers issued participating policies; however, today, inmost jurisdictions, a mutual insurer is free to issue nonparticipating policies.
  51. Fraternal Associations
    • a. These are nonprofit organizations that operate on the basis of a lodge, societyor order.
    • b. They normally sell only to their members.
  52. 4. Reciprocal Insurance Company (Assessment Insurer)
    • Normally referred to as a Reciprocal Exchange because it is unincorporated and each insured insures the other insureds in the association. This makes participants in the pool an insurer and an insured unlike a traditional insured of a commercial insurer with just a premium payment obligation.Three main differences between Reciprocal and Traditional are as follows:
    • a. An Attorney-in-Fact manages a reciprocal insurance company and does not need a license.
    • b. If funds are not sufficient to pay claims, the subscribers may be assessed additional premium.
    • c. Each subscriber assumes a pro rata portion of the risk of all the other subscribers.
  53. 5. Lloyds Associations (Lloyds of London and Lloyds of America)
    • a. Not considered an insurance company.
    • b. Provides a meeting place and clerical services to its members, who actuallytransact the business of insurance (members are individually liable for therisk they assume).
    • c. Coverage provided is underwritten by a Syndicate Manager (also may beknown as an Attorney-in-Fact) or an Individual Proprietor.
    • d. No corporations or other limitations on liability are permitted, so membersexpose their entire fortune on each risk they accept.
  54. 6. RetentionGroups
    • The 1986 Risk Retention Act made obtaining coverage more efficient, easing the process of forming a Retention Group and allowing certain groups that are difficult to insure the opportunity of coverage.The following are the qualification requirements:
    • a. Be made up of homogeneous units, enabling the use of the law of large numbers to predict losses.
    • b. Have sufficient liquid assets to meet loss obligations.
    • c. Each member assumes a portion of the risk; larger groups have larger assetpools to cover losses.
  55. 7. Captive Insurance Company
    • a. An insurance company organized in instances when insurance cannot bepurchased from commercial insurance companies for a business risk. In many instances, companies within an industry form a joint captive insurance company for such a reason.
    • b. Captives retain substantial portions of each loss and then purchase reinsurance above these levels through the international reinsurance market at a more favorable premium, with higher limits of coverage.
    • c. Captives provide an alternative funding mechanism when coverage breadth or capacity in traditional insurance markets does not meet the insured’s needs, and can provide cost savings, cash flow benefits, and specialized loss prevention and claims services not otherwise available.
    • d. Given capital and operating expense requirements, captives are generally of interest only when applicable premiums are substantial (i.e. $2,000,000).
    • e. Investment returns can be obtained directly on the captive’s invested capital.
    • f. The company has its own manager and typically conducts a formal officersmeeting annually.
  56. Admitted versus Nonadmitted Insurers
    Admitted insurers have been authorized by the Commissioner of Insurance (Director or Superintendent) to transact business in this state. Nonadmitted insurers have not sought approval from the Department or have been unable to obtain such approval. (Any insurer doing business in this state must operate under a Certificate of Authority.) Insurance that cannot be placed with a licensed admitted company may be placed with an authorized nonadmitted company by a Surplus Lines Broker.
  57. Private versus Government Insurers
    • Most insurance is written through private insurers, but there are instances where governmental based insurers stepped in to offer an insurance alternative when private insurers were unable to provide protection usually relating to the catastrophic nature of the risk, capacity to handle the risk, and lack of desire to engage in a line of insurance where experience to evaluate necessary premium intake to offset potential loss is lacking. Examples of government insurance are:
    • 1. Federal social insurance programs (Social Security, Medicare, Medicaid).
    • 2. Federal Crop Insurance.
    • 3. Federal Crime Insurance.
    • 4. Federal Flood Insurance.
    • 5. Federal Riot Reinsurance. Considering the number of fraudulent claims in the overall insurance industry,governmental sponsored programs such as Medicare, Medicaid, Social Security disability and Workers’ Compensation account for a significantly high volume.
  58. Domicile of Insurers
    • 1. Domestic – those insurers that are incorporated in this state.
    • 2. Foreign – those insurers that are incorporated in any other state.
    • 3. Alien – those insurers that are incorporated in another country. Any of these insurers may conduct business in this state if they are admitted.
  59. 1. Actuarial
    gathers and interprets statistical information to aid in rate-making/ setting.
  60. 2. Underwriting
    responsible for risk selection and rating; works with the field underwriter to accomplish acceptance.
  61. 3. Marketing/Sales
    responsible for advertising and selling (insurance policies) to the public.
  62. 4. Claims
    provides service to the policyholder in the event of a loss.
  63. 5. Executive Staff –
    oversees and regulates the business.
  64. 1. Branch Office System
    – a branch sales manager is a salaried employee of the insurer and is in charge of sales.
  65. 2. General Agency System
    the general agent has a contract with the insurer to place business with that insurer and may also hire agents to work for him/her.
  66. 3. American Agency System
    an independent contractor sells and services insurance contracts and may represent an unlimited number of insurers.
  67. 4. Direct Writers
    the agent is either a salaried employee or on commission representing solely one company (as exclusive or captive agent).
  68. 5. Direct Mail or Direct Response
    a marketing system that offers contracts to the public through direct mail, newspapers, radio, television, magazine advertising, and vending machines. The insurer markets the policies from the home office. A person interested in a policy will typically contact the insurer for information that is provided with an application to be completed and returned.
  69. Insurance Company Financial Structure
    1. The Department or Division of Insurance regulates all insurers doing business in this state. Protection against the insolvency of an insurer is its major concern.
  70. Insurance Company Financial Structure
    . The Department or Division regulates the organization and ownership, capitaland surplus requirements, reserves, accounting, investments, annual statements, rehabilitation of impaired insurers and the liquidation of insurers when necessary.
  71. Insurance Company Financial Structure
    • 3. The Department’s or Division’s main goal is the protection of the general public through the use of the following reports and regulations.
    • a. Investments v insurance regulations require that all investments be approvedby the insurer’s Board of Directors. Most investments are required to beinvested in something that is fairly stable.
    • b. Annual Statement v every insurer authorized to transact business in thisstate must file a financial report with the Department or Division annually. The financial report must be detailed so the Department or Division might see anything of financial concern.
    • c. Examination of Insurers – the Department or Division conducts examinations on every insurer in this state. The examination may be as often as the Department or Division deems necessary.
    • d. Rehabilitation and Liquidation – regardless of the regulations and controls, a few insurers find themselves in financial difficulty. When this happens, the Department or Division will step in and attempt to help the insurer become solvent again. Only as a last resort are insurers declared insolvent, and the liquidation process started.
  72. Insurance Company Financial Structure
    4. The Department or Division may implement a rehabilitation plan if it determines that the insurer could be reorganized, consolidated, converted, reinsured or merged. Under a rehabilitation order, the Department or Division maintains control of the insurance company until management can be turned over to private management once the problems have been solved.
  73. Insurance Company Financial Structure
    5. Evaluating an insurer’s surplus is very important. Any major change in surplus from year to year should be carefully scrutinized to determine the cause. Surplus is the excess assets, over liabilities.
  74. Financial Rating Agencies
    Agents are responsible for placing business with insurers that are financially sound. Several independent financial rating services provide ratings available to the public. Four of the most popular services are A.M. Best, Standard’s and Poor’s, Moody Investment Services, and the Weiss Insurance Ratings. Each service assigns rating codes to show strength or weakness of each company rated.
  75. 1. Insurer as Principal
    • The insurer is the source of the authority in which the producer/agent must abide.
    • a. When acting within the scope of authority, the insurer is responsible for all ofthe producer’s/agent’s acts.
    • b. When the producer/agent exceeds the authority in the agency contract, theproducer/agent may be in the position of being personally liable for his/heractions.

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