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72 Cards in this Set

  • Front
  • Back

independent insurance agents

sell the insurance products of several companies and work for themselves or other agents. The independent agent owns the expirations of the policies he sells, meaning the individual may place that business with another insurer upon renewal if in the best interest of the client

exclusive or captive agents

represent only one company. These agents are sometimes referred to as career agents working from career agencies. Most often, these captive or career agents are compensated by commissions
General agents or managing general agents (MGAs)
hire, train, and supervise other career agents within a specific geographical area. The MGA is compensated by commissions earned on business sold by herself as well as an overriding commission (overrides) on the business produced by the other agents managed by the general agent. An MGA has field underwriting and binding authority only in property and casualty insurance

Direct-writing companies

usually pay salaries to employees whose job function is to sell the company’s insurance products. Technically, these salaried employees do not function as agents. Commissions are usually not paid and the insurer owns all of the business produced

direct-response marketing

conducted through the mail, by advertisements in newspapers and magazines, and on television and radio. Policies sold using this method have limited benefits and low premiums, such as disability only

franchise marketing

provides coverage to employees of small firms or to members of associations. Unlike group policies where benefits are standard for classes of individuals, persons insured under the franchise method receive individual policies that vary according to the individuals’ needs.




Franchise plans are attractive to employers who do not, according to the laws of their state, meet the qualifications for a true group. These plans allow the employers to offer individual insurance to their employees at a lower premium than for insurance purchased on an individual basis. Premiums may be deducted from the individual’s paycheck.

producer

  • term is becoming inceasingly common
  • Many states have replaced separate agent and broker licenses with a single producer license.
  • Producers may function as agents, representing the insurance company, or as brokers, representing the potential insured.
  • Producers acting as agents are not only categorized by their function in the industry but also by the line of insurance they sell.

life and health insurance agents

  • Generally, life and health insurance agents represent the insurer to the buyer with respect to the sale of life and health insurance products.
  • appointed by the insurer, and usually the agent’s authority to represent the insurer is specified in the agency agreement between them, which is a working agreement between the agent and the insurer.
  • Life and health insurance agents generally do not have the authority to issue or modify insurance contracts.
  • Customarily, life and health insurance agents are authorized to solicit, receive, and forward applications for the contracts written by their companies.
  • The agent may receive the first premium due with the application, but usually not subsequent premiums, except in industrial life insurance.
  • The insurance company approves and issues the contract after receiving the application and premium from the applicant through the agent.
  • The agent cannot bind coverage. This means that an agent cannot commit to providing insurance coverage on behalf of the insurance company.

property and casualty agents

  • Agents appointed by property and liability insurance companies generally are granted more authority.
  • These agents may bind or commit their companies by oral or written agreement.
  • They sometimes inspect risks for the insurance company and collect premiums due.
  • They may be authorized to issue many types of insurance contracts from their own offices

brokers

  • In contrast to the agent-client relationship in which the agent represents the insurer to the purchaser, a broker represents the buyer to the insurer.
  • A broker may do business with several different insurers.
  • Brokers are independent sales representatives who select insurance coverages from these various companies for their clients.
  • Brokers must be licensed just like agents, and generally their routine activities and functions are similar to those of agents.
  • Brokers solicit applications for insurance, may collect the initial premium, and deliver policies. Brokers do not have the authority to bind coverages.

solicitors

a salesperson who works for an agent or a broker. This working relationship is most common in the property and casualty insurance field.

insurance consultants

A very small group of insurance professionals call themselves insurance consultants. Consultants are not paid by commission for the sales of insurance policies. Instead, they work strictly for the benefit of insureds and are paid a fee by the insureds they represent.

insurance

  • developed as a means for spreading a financial loss among many persons so that the cost to any one person is relatively small
  • a contract that indemnifies another against loss, damage, or liability arising from an unknown event

indemnify

to make a person whole by restoring that person to the same financial position that existed before the loss

premium

the insured (policyowner) pays a set amount of money (premium) to the insurer. In return, the insurer agrees to pay the other party (insured beneficiary) a set sum (benefit) upon occurrence of the event

policy

  • legal doc that establishes the agreement between insurer and insured (a.k.a contract of insurance)
  • insurer promises to pay the insured according to terms of policy if loss occurs

loss

reduction in the value of an asset

claim

demand for part of the insurance benefit to the person named in the policy

risk

involves 2 things: a possibility of loss and an uncertainty about whether it will occur

2 types of risk

  1. pure risk: only a chance of loss, loss may or may not happen, no possibility for gain (example: chance of an accident). Only pure risk is insurable!
  2. speculative risk: involves both uncertainty of loss and of gain, undertaken voluntarily (ex: betting at a race track, investing)

factors that cause or give rise to risk

perils and hazards

peril

  • immediate specific event causing loss and giving rise to risk
  • the cause of a risk
  • ex: fire is the peril of a burning building
  • ex: death is the peril when someone dies

hazard

  • any factor that gives rise to a peril
  • for purposes of life insurance, there are 3 basic types of hazards (physical, moral, morale)

physical hazards

arise from material, structural, or operational features of a risk situation (ex: slippery floors or unsanitary conditions)

moral hazards

arise from people's habits and values (ex: filing a false claim)

morale hazards

arise out of human carelessness or irresponsibility (texting while driving)

STARR

  • 5 methods for dealing with risk
  • Sharing
  • Transfer
  • Avoidance
  • Reduction
  • Retention

sharing risk

  • appropriate when a risk can't be avoided and retention would cause too much exposure to loss
  • the individual's own loss may not be as great if it occurs, but they may have to pay a portion of the losses experienced by others

transfer of risk

  • transfer risk to another party that is more willing or able to bear it (usually an insurance co)
  • some non-insurance transfers of risk occur, such as when one agrees to assume the risk of another under the terms of a written contract

avoidance of risk

avoid risk in the first place! If you don't fly, you won't get in a plane crash

reduction of risk

  • if you can't avoid, reduce
  • reduce the chance that a particular loss will occur, or reduce the amount of a potential loss if it occurs
  • ex: installing a smoke alarm won't reduce the chance of fire, but reduces risk of loss from fire

retention of risk

  • doing nothing about the risk
  • people assume or retain risk and, in effect, become self-insurers

law of large numbers

  • easier to predict how many losses will occur in a large group
  • larger group = more predictable future losses will be for a given time period
  • insurance rates and premiums must be based on broad averages of expected losses
  • essential that a large # of similar risks or exposure units be considered

exposure unit

  • the item of property or the person insured
  • in life and health insurance, it is the economic value of the individual person's life
  • in property and casualty insurance, it's the # of cars, homes, etc

insurable interest

  • must have a legit interest in the preservation of the life or property insured (your own life, life of close blood relative or spouse)
  • can also be based on a financial loss that will take place if the person dies (business partner whose death would hurt the biz)
  • must exist at the time of the application, but need not exist at the time of the insured's death
  • affects who may purchase a policy, but not who may benefit from a policy (you could purchase insurance on your own life and name a charity as the bene)

characteristics of insurable risks

  1. large numbers of homogenous units
  2. loss must be measurable
  3. loss must be uncertain
  4. economic hardship
  5. exclusion of catastrophic perils

catastrophic perils

  • many policies exclude losses resulting from war, nuclear hazards, flood, and earthquake
  • coverage for some of these exposures are available thru gov't programs or specialty insurers
  • no way to reasonable price these
  • mostly for property and casualty insurance

indemnity

  • concept which states that insurance should restore the insured, in whole or in part, to the condition they enjoyed before the loss
  • could be pmt for the loss or repair/replacement of the damaged or destroyed property
  • for life/health insurance, a person's economic value or human life value is the individual's present and future earning power
  • ex: covering salary of breadwinner, wages lost due to broken arm

subrogation

  • entitles one who has paid for another's loss to take over the other's right to recourse from the party responsible for the loss
  • this clause in a policy gives the insurer the right to sue (for itself or on behalf of the insured) the responsible party
  • prevents the insured from collecting from both the insurer and the liable party
  • never used in life insurance, seldom in health insurance

limit of liability

  • max amt the insurer will pay for a specified insured contingency
  • called "face amount" in life insurance (ma liability on the insurer for a death claim)
  • policies are more likely to specify a max benefit or period (ex: max benefit amount such at $10k, or lifetime max benefit such as $1 mil)

deductible

  • initial amount of a covered loss that the insured must absorb before the insurer begins to pay for additional loss amounts
  • not used for life insurance
  • common for medical insurance
  • disability insurance usually has a time deductible called the "elimination period" or a waiting period

elimination period

number of days an insured must be disabled before disability income benefits become payable

purpose of a deductible

minimize small nuisance claims and keep premiums down (you can purchase higher deductibles that come with lower premiums)

coinsurance

  • common in medical insurance policies
  • insured and insurer share allowable expenses within a specified coverage range
  • discourages unnecessary or excessive treatments

A policy has a $500 deductible and 20%/80% coinsurance on the next $10k. How much will the insured and insurer pay on a $5500 medical bill?

Insured pays $1500 ($500 deductible + $1000 (20% of $5000))


Insurer pays $4000 (80% of $5000)

property insurance

covers the risk of damage or loss to property, which is defined as a building, equipment, stock, or contents

casualty insurance

  • protects against financial consequences of legal liability, including that for death, injury, disability or damage to real or personal property
  • includes auto policies, general liability policies, worker's comp coverage, crime insurance, surety(bonding), boiler and machinery coverages

life insurance

  • coverage on human lives, including endowments and annuities, and may include benefits in the event of accidental death or dismemberment and benefits for disability
  • designed to protect against risk of premature death, which exposes a family or business to certain financial risks (burial expenses, debts, loss of income, etc)

annuity

  • provides guaranteed income for the life of an annuitant
  • designed to protect against the risk of outliving retirement assets

accident and health or sickness insurance

  • protects against financial loss caused by sickness, bodily injury, or accidental death and may include benefits for disability income
  • may reimburse for actual medical expenses or provide protection for loss of income due to accident or sickness

variable life and variable annuity products

carry investment risk (you can lose or gain money depending on the market), people who sell them must have and insurance license and a securities license

credit

a limited line of insurance protecting the insured, who is usually a creditor, against the financial consequences should a debtor be unable to pay debts as a result of illness or death

other types of insurance

title insurance, crop insurance

3 major types of insurers

  1. private commercial insurers (profit making)
  2. private noncommercial insurers (nonprofit service orgs)
  3. US Gov't (special nonprofit)

nonprofit insurers

profits are returned to subscribers in the form of reduced premiums or expanded benefits (Blue Cross Blue Shield)

stock insurers

  • a stock insurance company has stockholders (shareholders) who own shares in the company. They select the Board of Directors which elects officers who conduct daily operations for the biz
  • also called a "nonparticipating company" because policyholders DO NOT participate in dividends resulting from stock ownership

mutual insurers

  • a mutual company has no stockholders, only policyholders or policy owners. They vote for the Board who elects officers
  • funds that aren't paid out after paying claims are returned to policyowners as "policy dividends"
  • "participating companies" because policyholders participate in divs

reciprocal insurers

  • unincorporated groups of people that provide insurance for one another thru individual indemnity agreements
  • each individual is called a "subscriber"
  • each subscriber has a separate account that they pay premiums to and earn interest on
  • if anyone suffers a loss, each acct pays an equal amount
  • and attorney-in-fact handles all of the work and is overseen by an advisory committee of subscribers

fraternal insurers

"fraternal benefit societies," primarily life insurance carriers that exist as social orgs and usually engage in charitable and benevolent activities

Lloyd's of London

  • not an insurance company
  • provides a meeting place and clerical services to its members who actually transact the business of insurance
  • members are individually responsible and liable for their insurance contracts

reinsurers

  • they insure insurers
  • an insurance co transfers a portion of a risk is has assumed to another insurer
  • limits the loss any one insurer would face should a very large claim become payable
  • company transferring risk is the "ceding company"
  • company assuming risk is the reinsurer

facultative reinsurance

negotiated on an individual risk basis



treaty reinsurance

involves an automatic sharing of risks by the ceding company

excess and surplus lines

  • when a risk is difficult to place in the normal marketplace
  • if a risk is very large or unusual, typical carriers may be unwilling to assume it
  • insurance for which there is no market thru the original producer or that is not available thru authorized carriers in the state where the risk is
  • a licensed excess or surplus lines broker will get the business and attempt to place it with an unauthorized carrier

risk retention groups

  • have members who are engaged in similar business or activities
  • they assume and spread all, or a portion, of the liability exposure of the members
  • only liability insurance, no worker's comp or personal lines insurance
  • regulated by the state where they are domiciled
  • can transact insurance in any other state without further regulation

self-insurers

  • risk retention
  • they set aside reserve funds to cover losses and purchase excess insurance to cover any large losses or aggregate losses above a given level
  • anyone who doesn't purchase needed insurance is a self-insurer

US Gov't as an insurer

  • has many programs to provide insurance (SS benefits, military life insurance benefits, fed employee comp benefits, various retirement benefit programs)
  • also supports programs to cover catastrophic events (war risks, nuclear energy liability, flood, crop losses)
  • state gov't provides insurance for unemployment, worker's comp, disability
  • local gov'ts participate in providing medical, disability, and retirement benefits

domestic insurers

a company is a domestic insurer in the state where it's incorporated

foreign insurers

licensed to conduct business in states other than the one in which it was incorporated (includes DC or other US territories)

alien insurers

incorporated in a country other than the US, DC, or any US territory

authorized/admitted

entitles to transact insurance within the state, having complied with the law and satisfying all conditions

unathorized/nonadmitted

not entitled to transact insurance within the state (some types of transactions, like surplus lines or reinsurance, may be permitted by unauthorized companies, but are still regulated