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300 Cards in this Set

  • Front
  • Back

Segregation of duties

Requires an employer to design jobs so that job tasks do not place an employee in a position to conceal errors or irregularities in the normal course of his employment.

Ex: one team brings in cash, another records it


systematic way for a company to record, group, summarize similar types of financial transactions

Financial vs Management Accounting

Financial Accounting: Process of reporting a company's financial accounting informaiton to meet the needs of the company's external stakeholders

-Internal stakeholders

-Required by law

-subject to specific accounting principles

-specified times over specified period

-Emphasis on precision of data

-Historical focus

-Business as a whole

-Culminates in the presentation of financial statements: Is an end in itself

-Subject to external audit

Management Accounting: process of identifying, measuring, analyzing, and communicating financial information to a company's internal and external stakeholders, particularly company managers, so they cna decide how best to use the company's resources.

-Internal stakeholders

-Not required by law

-Not subject to specific accounting principles

-any time, for any period

-Emphasis on flexibility and relevance of data for managers

-Forward-looking focus

-Business as a whole or on individual parts of the business

-Helps managers make decisions: is a means to an end

-Not subject to external audit

Four Types of Financial Accounting

1. Premium accounting

2. Investment accounting

3. General accounting

4. Tax accounting

Premium Accounting

accounting operation that maintains detailed accounting records of all fnancial transactions related to the policies an insurer has issued (sold).

Investment Accounting

records transactions related to the assets in an insurer’s investment portfolios.

General Accounting

includes the basic accounting operations that all businesses undertake. One example is payroll accounting.

Payroll Accounting

Type of general accounting: Payroll accounting involves calculating employees’ wages, preparing paychecks, maintaining payroll records, and producing payroll reports for internal management and government agencies.

Disbursement Accounting

Type of general accounting: The objectives of disbursement accounting are to (1) provide a permanent record of all cash disbursed or paid out, (2) confrm that all cash disbursements are properly authorized, and (3) ensure that all disbursements are charged to the proper account.

Tax Accounting

g keeps records related to all the company’s taxes and prepares tax returns and flings such as tax forms for employee wages, producer commissions, and policyowner beneft payments and withdrawals.

Premium Taxes

taxes calculated on premium income an insurer earns within a particular jurisdiction


is the process of (1) classifying items in a transaction as assets, liabilities, capital, surplus, revenues, or expenses, and (2) recording the transaction in the company’s accounting records.


process of calculating the monetary value of a company’s assets, liabilities, and capital for accounting and financial reporting purposes.

Generally Accepted Accounting Principles (GAAP)

set of fnancial accounting standards, conventions, and rules that U.S. stock insurers follow when summarizing transactions and preparing fnancial statements

Going Concern Concept

The underlying premise of GAAP is the going-concern concept, which means that accounting records are based on the assumption that a company will continue to operate indefnitely.

Statutory Accounting Practices

accounting standards that all life insurers in the United States must follow when preparing the Annual Statement and other fnancial reports that they must submit to state regulators. Focus on solvency.

Codification of Statutory Accounting Principles

Single, basic set of written standards among the states. States can elect to use the codification or maintain its own unique sets

Accounting Conservatism

typically understates the values for a company’s assets, overstates the value of a company’s liabilities and expenses, and projects a lower level of net income than would be the case if the company used a less conservative reporting method, such as GAAP. (want to demonstrate that they can meet financial obligations even under adverse circumstances)


International Financial Reporting Standards

Developed by IASB (International Accounting Standards Board).

promote consistency, comparability, and more complete disclosure of information included in corporate fnancial statements.

Cash Flow statement

which provides information about the company’s cash receipts (infows), cash disbursements (outfows), and the net change in cash (the difference between cash infows and cash outfows) during a specifed accounting period

Statement of Owner's Equity

shows the changes that occurred in owners’ equity between two sequential balance sheets

Asset Valuation

Statutory accounting practices prescribe specifc rules for asset valuation—the process of calculating the monetary values for assets.

Three categories that life insurers divide their assets into

1. Admitted Assets

2. Partially Admitted Assets

3. Nonadmitted Assets

Admitted Assets

those whose full value can be reported on the Assets page of the Annual Statement. Typical admitted assets include cash and other high-quality assets such as investment-grade securities and amounts due to the insurer within 90 days.

Partially Admitted Assets

those for which only a portion of their monetary value is reported on the Assets page of the Annual Statement. Partially admitted assets include invested assets that are decreased by any amount that exceeds the statutory investment limitations.

Nonadmitted Assets

those that are not listed or valued on the Assets page of the Annual Statement. These assets, which are presumed not to affect an insurer’s ability to pay its future obligations, include furniture, offce supplies, advances to producers, speculative or low-quality investments, and amounts due the insurer in 90 or more days.

2 Components of management accounting

1. Cost Accounting

2. Budgeting


process that creates a fnancial plan of action designed to help an organization achieve its goals.

Master Budget

Typically, the individual budgets for each department or area are combined into the company’s master budget, which shows the overall operating and fnancing plans for the company during a specifed accounting period.

Can also be thought of as profit plan, because acheiving the goals in the master budget should result in a profit.

Variance analysis

compare actual results to budgeted amounts.

Favorable variance

actual revenues are greater than expected revenues or actual expenses are less than expected expenses.

Unfavorable variance

actual revenues are less than expected revenues or actual expenses are greater than expected expenses.

Cost Accounting

system for accumulating and categorizing expense data. The objectives of cost accounting are to (1) establish effective cost controls and (2) generate accurate estimates of future costs for use in pricing a company’s products.

Role of Treasury Operations

1. Ensure segregation of cash receipts, cash disbursements, bank reconciliation

2. Collection procedures are efficient and independently monitored

3. Controls for authorization, check security and accounting records for cash disbursements are maintained

4. Liquidity management


a post offce box that policyowners use to remit payments.

Institutional Investing

the professional management of money that belongs to others—individuals, corporations, and governments.

Investment management

consists of all the activities performed to invest a company’s excess cash, generally in long-term investments. Recall that short-term investments are often the responsibility of treasury operations.

6 Components of an investment policy

1. Insurers Investment Objectives

2. Types of investments needed to achieve investment objectives

3. Minimum standards for safety of the principle invested

4. Types of risks that can and can't be taken

5. Max amount of money that each level of staff can authorize

6. Regulatory constraints of investment

Interest Spread

the difference between the rate of return the insurer earns on its investments and the interest rate credited to products on behalf of customers

4 Components of Insurer's Investment Objectives

1. Create investment portfolios w/ cash flow properties consistent with asset/liability management strategy

2. Meet obligations to policyholders

3. Contribute to growth of insurer's earning and surplus

4. Maintain adequate interest spread

Risk-Return Trade-Off

all other factors remaining equal, the greater the risk associated with an investment, the greater the expected return. Likewise, all other factors remaining equal, the lower the risk associated with an investment, the lower the expected return


—the amount originally invested.

Required Rate of Return

sum of the risk-free rate of return and the risk premium.

Required rate of return = Risk-free rate of return + Risk premium

Risk-Free Rate of Return

the return on a risk-free investment—the least risky investment opportunity available.

Risk Premium

the compensation that investors demand for taking on the risk associated with a specifc investment.

Buy-and-hold strategy

(as opposed to active management strategy)

investment staff carefully select securities and expect to hold them for long periods, or until they mature, are prepaid, or default. The total mix of the asset portfolio remains fairly constant.

Choosing appropriate securities is crucial for this strategy to succeed, because the asset/liability manager bases investment success largely on the original portfolio selections

Active Management Strategy

(as opposed to buy and hold strategy)

investment staff view any investment in a portfolio as potentially tradable, if trading the investment would improve the portfolio’s performance. Theoretically, the entire mix of assets in the portfolio can be changed at any time.`

6 Factors to consider when evaluating investments

1. Cash flow patterns

2. Expected rate of return (gain in the value of the asset + any income earned)

3. Risk characteristics of the investment

4. Liquidity of the investment

5. General economic conditions

6. Regulatory requirements

Investment activity report

specifes the details of all portfolio transactions

Investment portfolio performance review

summarizes the insurer’s investment performance for the board of directors and the investment committee.

Debt security

a security represents either (1) an obligation of indebtedness owed by a business, a government, or an agency, or (2) an ownership interest. When the security represents an obligation of indebtedness, it is called a debt security.


Debt securiity in which an investor lends money to a corporation or government that borrows the funds for a defned period of time at a fxed interest rate

Equity Security

A security that represents an ownership interest (stock)

Public offering

, the security issuer makes a new security available for sale to the public. Must be registered with government agencies (like the SEC)

Private placement

the issuer sells the security directly to a limited number of investors, typically institutional investors. Although private placements are subject to regulatory oversight, they do not have to be registered with government agencies

Securities Exchange

a market in which buyers and sellers of securities—or their agents or brokers—meet in one location to conduct trades

Over the counter (OTC) market

an electronic communications network over which securities that are not bought and sold on an exchange are traded

General account

—an asset portfolio that supports a life insurer’s contractual obligations to owners of guaranteed products,

Fixed income investments

provide a predictable stream of income (like bonds and mortgages)

2 Forms of Regulatory Requirements for general account investments

1. Quantitative limitations

Ex: Ssstate may only allow up to 20% of admitted assets in stock

2. Prudent person approach: requires insurer to act like a practical person would

Separate Account

one or more asset portfolios that support an insurer’s variable products, such as variable life insurance policies and variable annuities.


pools of investments with distinct investment strategies

Investments held in an insurer’s separate account are not subject to the same regulatory restrictions as the investments in the general account

Mutual Fund

an investment company that pools the funds of customers and usually invests in a certain type of investment, such as stocks, bonds, or other securities.

5 Primary Ways insurers invest their money


2. Mortgages

3. Stocks

4. Real Estate

5. Policy Loans

Bond's Par Value

The amount owed is specifed on the bond and is called the bond’s par value

Bonds are the largest investment holding in general accounts because they are relatively safe and have predictable cash flows.

Bond's maturity date

The bond issuer is legally obligated to pay the bondholder the par value of the bond on the maturity date.

Coupon Rate

Interest rate on a bond, typically repaid semiannually to the bondholder

Since the coupon rate is fixed, bonds are known as fixed income investments

2 Ways a bondholder can earn a return

1. Receipt of coupon payments

2. Capital gain upon sale of the bond before it matures

Capital Gain

amount by which an investment is sold for more than its purchase price.

Capital Loss

the amount by which an investment is sold for less than its purchase price

Bond market price

Not the same as par value necessarily, because based on the price the bond can be traded on the open market. Changes as market interest rates change. As interest rates rise, bond prices fall and visa verse. (inversely related)

Explanation of why bonds lose value when market rate increases

Ex: If you buy a bond with a 6% coupon rate on a $1000 par value bond, you get $60 annually. If market interest rates increase, new bonds will be issued with coupon rates of 7%. Buyers would purchase new bonds at the 7% rate instead of your bond's at 6%. To find a buyer, you would have to reduce the price below 1000 or sell at a discount.

In reverse, if you have a 1000 par value with 6% coupon rate, and interest rates fall to let's say 5%, buyers would rather buy your bonds than buy new. You could demand a price above 1000 or sell at a premium.

A bond is always worth its par value on the maturity date.

6 characteristics of a bond that determine the degree of risk to the purchaser

1. Term to maturity

2. Default risk

3. bond rating

4. call provision

5. convertability

6. collateral

Term to maturity

Most important factor to determining risk: Bonds with long terms to maturity are more suceptible to interest rate risk because interest rate changes are more likely over long periods of time. Long term bonds generally have higher coupon rates

Default risk

Risk that a bond issuer will be unable to make interest payments when due

Bond ratings

a letter grade that a bond rating agency assigns to indicate the quality of a bond issue.

Call provision

states the conditions under which the bond issuer has the right to require the bondholder to sell the bond back to the issuer at a date earlier than the maturity date. May be forced to sell at a bad time.


A convertible bond can be exchanged for shares of the issuing company’s common stock at the option of the bondholder. Lower risk because increases the ways to generate a return on investment (because can share in a company's good fortune). Generally lower coupon rates because lower risk.

Investment grade bonds

Bonds that are rated in the higher categories

High yield bonds or junk bonds

Bonds rated in the lower categories by companies like Moody's or Standard and Poor's


Bonds may be either secured or unsecured, depending on whether the bond is backed by collateral—an asset that is pledged as security for a loan until the debt is paid.

Assets that bond issuers commonly use as collateral include the bond issuer’s accounts receivable, product inventory, equipment, or real estate holdings.


Unsecured bonds, not backed by collateral. More risky, tend to have higher coupon rates.

2 Types of bonds

1. Corporate bonds

2. Government Bonds

Corporate Bonds

issued by corporations, typically very large corporations. Corporate bonds may be secured or unsecured, and many are callable.

Government Bonds

issued by national, state, provincial, or city governments to generate funds for government expenses, loan programs, or specifed large projects.

3 Common types of government bonds in the US

1. Federal government bonds

2. Agency bonds

3. Municipal Bonds

Federal Government Bonds

These bonds are backed by the credit and taxing authority of the federal government. Federal government bonds, such as U.S. Treasury bonds, typically have maturities of 10 to 20 years and are regarded as low-risk, low–coupon-rate investments.

Agency Bonds

Agencies of the federal government, such as the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), issue agency bonds to raise funds to buy or originate loans, such as home mortgage loans, farm loans, and education loans. Most investors believe that the U.S. federal government would not allow a federal agency to default on its obligations and so tend to think of agency bonds as low-risk investments.

Municipal Bonds

State, county, and local governments issue municipal bonds to fnance projects such as school and road construction and other large programs. An important characteristic of most municipal bonds is that the interest paid to bondholders is exempt from federal income taxation.

May be general obligation bonds

General Obligation Bonds

backed by the credit and taxing authority of the issuing government,

Revenue Bonds

backed by the cash flow of a particular revenue-generating project for which the bonds were issued, such as a toll road or a public university dormitory.


long-term loan, secured by a pledge of specifed property, that the borrower agrees to pay off with regular payments of principal and interest.

Used primarily for commercial properties


reduction of a debt by regular payments of principal and interest that result in full payment of the debt by the maturity date

Fixed income investment

3 Reasons that Mortgages are riskier than bonds

1. Generally resold less often than bonds (less liquid)

2. Changing market interest rates

3. Subject to risk that the debtor will default (like bonds) but unlike bonds, they are not rated by a bond rating agency (difficult to evaluate)

Collateralized Mortgage Obligations (CMOs)

bonds secured by a pool of residential mortgage loans.

Common Stocks

a type of stock that entitles its owners to share in the company’s dividend payments. Dividends may be paid in cash—cash dividends—or in additional shares of stock—stock dividends

Generally riskier than bonds

3 Reasons stocks are riskier than bonds

1. Cash flow for stocks varies more than bonds and Dividend can change over time (bonds are contractually fixed in amount and timing)

2. Stocks fluctuate more because not maturity date or maturity value

3. Stockholders have a lower priority to claim than bondholders

Sale and leaseback transaction

h the owner of a building sells the building to an investor—in this case an insurance company—but immediately leases back the building from the investor

lessee vs lessor

The individual or organization that leases the building from the insurer is known as the lessee and is responsible for the maintenance and operation of the building. The insurer, as lessor, is freed from maintenance and other property administration responsibilities.


Predictability of Income Stream: Predictable

Agency Ratings of Investment: yes

Provides Collateral: Some Issues

Degree of Liquidity: Good


Predictability of Income Stream: Predictable, but less so than bonds

Agency Ratings of Investment: No, with the exception of CMOs

Provides Collateral: Yes

Degree of Liquidity: Less than bonds


Predictability of Income Stream: Less so than bonds and sometimes very unpredictables

Agency Ratings of Investment: No

Provides Collateral: No

Degree of Liquidity: Good

Real Estate

Predictability of Income Stream: Less so than bonds

Agency Ratings of Investment: No

Provides Collateral: Yes

Degree of Liquidity: Illiquid

Policy Loan

loan a life insurance company makes to the owner of a life insurance policy that has a cash value.

-An insurer can't control the timing of a policy loan

-Do not require the borrower to make systematic payments

-Do not have contractual maturity dates


the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, business partners, and society at large.

Agency Operations

Insurers that distribute their products primarily through producers may separate those operations into an area commonly known as agency operations

Marketing's division between corporate and agency operations

1. Corporate Marketing oversees: company wide marketing campaigns directed primarily to external customers

2. Agency Marketing implements regional or local marketing plans directed toward producers and sometimes external customers.

Marketing Plan

a written document that states the marketing goals for a product or product line. The marketing plan also describes the strategies the company will use, the ways it will put the plan into action, and how it will set controls to make sure goals are achieved

Marketing Mix

Insurers’ marketing goals typically involve managing four primary marketing variables—product, price, promotion, and distribution—which are collectively known as the marketing mix.


e goods, services, or ideas that a seller offers to customers to satisfy a need

Product Mix

total assortment of products available from a company.


monetary value of whatever a customer gives in exchange for a product.

Financial Design

The price of an insurance product is based on a combination of fnancial features that are known as the fnancial design of the insurance product.

4 Considerations, from a marketing perspective, of the financial design

1. Competition

2. Customer's Purchasing Powewr

3. Regulatory Requirements

4. Other marketing mix variables

Purchasing Power

the measure of a customer’s ability to buy goods and services. A customer’s purchasing power is strongly affected by the general conditions in the economy such as rates of infation, taxes, and unemployment.


collection of activities that companies use to make customers aware of their offerings and to infuence customers to purchase, and distributors to sell, a product.

4 Promotion tools used to convey messages to customers

1. Personal Selling

2. Sales Promotion

3. Advertising

4. Publicity

Institutional Advertising

promotes an idea, a philosophy, a company, a company’s brand message, or an industry.

Product Advertising

any advertising used to promote a specifc product or service. Insurance products are complex and can be diffcult to explain to customers in an advertisement, so product advertising is typically aimed at producers.

Advertising vs. Publicity

Advertising = paid for

Publicity = Not paid for


the collection of activities and resources involved in making products available for customers to buy

Three primary types of systems to distribute insurance products

1. Personal Selling

2. Third Party Institution

3. Direct Response

Personal Selling

Producers who either receive commissions or salaries from insurance companies sell products through oral and written presentations.

Third-party-institution distribution systems.

Banks or other fnancial institutions sell insurance products to their own customers but do not issue the insurance products.

Direct Response Distribution Systems

Insurers initiate or conduct the sales process by communicating directly with customers through direct mail, telemarketing, or the Internet.


the process by which a company establishes and maintains in customers’ minds a distinct place, or position, for itself and its products.

3 Things an insurance co does before developing and marketing a product

1. Id and evaluate the total market

2. Select segment of the total market

3. Develop and implement a marketing mix strategy

Market Segmentation

the process of dividing large, diverse markets into smaller submarkets that are more alike and need similar products or marketing mixes.

Single variable segmentation

Segmenting a market using only one characteristic

Consumer market vs Organizational market

Consumer Market: consists of individuals who buy products or services for personal or family use.

Organizational Market: people, groups, or formal organizations that purchase products and services for business purposes.

Multivariable Segmentation

based on a wide variety of customer characteristics

-Geographic location



Target Marketing

process of evaluating the attractiveness of each market segment to the company and selecting one or more of the segments

Undifferentiated Marketing

is a strategy by which a company defnes the total market as its target market and designs a single marketing mix for the entire market.

Concentrated Marketing

a strategy by which a company focuses all of its marketing resources on satisfying the needs of one segment of the total market for a particular type of product.

Differentiated Marketing

strategy by which a company attempts to satisfy the needs of different segments of the total market by offering a number of products and marketing mixes designed to appeal to the different segments.

Marketing Information System

—a set of procedures and methods for the regular, planned collection, analysis, and presentation of information for use in making marketing decisions

Unique visitors

refects the number of individuals who have visited a website at least once during a fxed time frame

Page views

the number of system requests for loading a single HTML page

Competitive Intelligence

information about competitors

Market Intelligence

information about ongoing developments in the marketing environment

Marketing research

a process of collecting, analyzing, interpreting, and reporting information in order to identify marketing opportunities and solve marketing problems

Marketing environment

consists of all of the elements in the company’s internal and external environments that directly or indirectly affect the company’s ability to carry out its marketing activities

Internal environment

those elements within the company that affect the company’s business functions and over which the company has control, including fnancial, physical, technological, and human resources; internal organizational structure; and the marketing mix.

External Environment

consists of elements that are outside the company and over which the company has little or no control, including economic, competitive, regulatory, taxation, and social factors.

Sales Analysis

company examines its sales numbers to evaluate current performance

Expense analysis

ties marketing costs to particular marketing activities to help marketing managers decide if a cost is worth the value of the activity.

Profitability Analysis

Compares the sales an activity generates with the expenses incurred to make those sales to determine proftability

Marketing audit

examine marketing goals, strategies, tactical/action programs, organizational structure, and personnel on a very broad basis.

Product Development

—the process of creating or modifying a product

3 Types of new products

1. Rate change

2. Revision

3. New product

Rate change

—Changing a fee or charge on an existing product


Any change that lies between a rate change and a new product, such as adding a rider to an existing policy

New Product

A signifcant new product feature or function

5 basic product development steps

1. Product planning

2. Business analysis

3. Technical design

4. PRoduct implementation

5. Performance monitoring and review

3 activities in product planing

1. idea generation

2. screening

3. concept testing

5 elements of a comprehensive business analysis

1. market analysis

2. product design objectives

3. feasability study

4. marketing plan

5. marketing projections

Field advisory council

which is a group of producers designated to represent and provide feedback from the sales force.

4 developments during technical design

1. Develop financial design

(company can cover future benefits even during crisis, package that will appeal to consumers, provide adequate return to company)

2. Creates application forms and sales contracts

3. Sets the products admin guidelines

4. develops a schedule and budget for implementation

Policy filing

is the act of submitting a policy contract form and any other legally required forms and documents to the appropriate regulatory authority for approval.

Issue instructions

guidelines showing the policy forms approved for use in each jurisdiction and the requirements that various functional areas need to follow when selling or administering the new product.

Buyer's guide

a publication that explains to customers how to determine how much life insurance coverage they need, describes the various types of life insurance polices, and educates customers about how to compare the costs of similar types of policies

Readability requirements

so that people who are not legal experts can understand the contract. Readability requirements typically limit word length, sentence length, and the amount of technical and legal language in the contract.

Policy summary

must provide to all potential insurance purchasers. A policy summary provides the customer with information specifc to the policy being purchased, including premium and beneft data for the frst fve policy years.

Disclosure statements

the policy summary for annuity products


—a written document describing specifc aspects of the security being offered for sale such as the insurer’s investment philosophy and objectives, fund expenses and fees, and past product performance.

Day 1 functionality

the administrative and systems processes that must be in place and functioning when the frst contract is sold

day 2 functionality

the processes that are necessary at some future date to service and administer the product, but which can be implemented after the product has been launched.

distribution system

the method a company uses to make its products available for sale to the public.

distribution channel

—specifc people, institutions, or communication methods that companies use to connect with their customers


an independent sales representative or company employee who is authorized to act on behalf of an insurance company in selling insurance products.

agency contrat

a written agreement that outlines the agent’s role and responsibilities and the agent’s compensation.


the retention of business that occurs when an insurance policy remains in force as a result of the continued payment of the policy’s renewal premium.

independent agent

Independent contractors who work for insurance companies

Indep. contractors = is a person who contracts to do a specifc task according to his own methods and who generally is not subject to the employer’s control except as to the end product or fnal result of the work.

career agent

e under a full-time contract with one insurance company and sell primarily that company’s life insurance products.

multiple line agent

sell life insurance, health insurance, annuities, and property-casualty products for one insurance company, with the preponderance of sales being property-casualty products.

home service agent

, sell specifed products, typically low-face-amount cash value life insurance with monthly premiums.

affiliated agent

they sell primarily the products of a single insurance company. Independent agents may also be affliated agents if they sell one insurance company’s products exclusively

field force

An insurer’s affliated agents are collectively known as its feld force,

Field office

Offices where field force work

general agent

. If an agent establishes and fnances a feld offce, this agent is often referred to as a general agent

general agency

Office of a general agent

first year commission

s a commission paid to a producer who sells a life insurance policy that is equal to a stated percentage of the amount of premium the insurer receives during the frst policy year.

Ex: if the premium collected is $1000 WITH A FIRST year commission of 50%, commission = $500

renewal commission

commission paid on policies every year for a certain number of years after the frst policy year. Renewal commissions are paid to the producer who sold the policy. Renewal commission rates are lower than the frstyear commission rate—usually 2 to 5 percent of premiums received—and they are paid only on policies that remain in force.

service fee

, which is a small percentage, often 1 or 2 percent, of premiums payable after renewal commissions have ceased, typically paid to agent currently servicing the policy

PPGA (personal producing general agent)

Sometimes independent agents—who are not affliated agents, but who place a substantial amount of business with one insurance company—may enter into a special arrangement with that company. The agent, known as a personalproducing general agent (PPGA), is an independent agent who receives special consideration for satisfying minimum sales production requirements.

overriding commission

A PPGA receives additional commissions, called overriding commissions, on the new or renewal business that these subagents sell.


an independent agent who does not have an exclusive contract with any single insurer or specifc obligations to sell a single insurer’s products

producer group

Some independent agents, brokers, and PPGAs have created producer groups—organizations of producers that negotiate compensation, product, and service agreements with insurance companies.

pre-contract training

a trial program that permits the candidate to become a producer while continuing to work at a current job.


Many jurisdictions require that, before an insurance producer begins to solicit insurance product sales on behalf of an insurer, the insurer must appoint, or offcially notify, regulators that it is authorizing that person to sell insurance on its behalf.

advanced underwriting

a group of specialists who will assist the producer in preparing proposals, and will accompany the producer, if requested, to sales presentations on how to use insurance products in a fnancial plan or estate planning

estate planning

the producer helps a potential customer to develop a program that will cover the customer’s current and future fnancial needs and will provide a means of conserving, as much as possible, the personal assets that the person wants to pass on to her heirs at her death.


is a practice in which a producer induces a customer to replace a life insurance policy or annuity contract with another product, multiple times, so that the producer can earn a series of frst-year commissions on the replacements.


occurs when a producer misrepresents the features of a policy to induce the customer to replace an existing policy.


is a practice in which a producer offers a prospect an inducement, such as a cash payment, to purchase a life insurance policy or an annuity and the inducement is not offered to all applicants in similar situations and is not stated in the policy itself. Rebating is legal in a few jurisdictions under certain circumstances.


In the personal selling distribution system, agents often meet individually with one potential customer, who is referred to as the prospect.

worksite marketing

Under a typical worksite marketing arrangement, an employer allows an insurer to offer the employer’s employees the opportunity to buy insurance or annuity products. The employer deducts employees’ premium payments from their paychecks through a payroll-deduction plan,

location selling system

A location-selling system is designed to generate customer-initiated sales at an offce or information kiosk in a store, shopping mall, or other noninsurance business establishment.

salaraied sales rep

company employee who is paid a salary for making sales and providing sales support.

independent financial advisor

s an individual registered with the Securities and Exchange Commission to give advice about investment securities


Insurers use wholesalers—an intermediary appointed by an insurer—to promote the insurer’s products to these institutional distributors and to provide these distributors with marketing support.

broker dealer

a fnancial institution that buys and sells securities either for itself or for its customers and provides information and advice to customers regarding the purchase and sale of securities


The distribution of insurance products to bank customers through a bank-affliated insurer is commonly referred to as bancassurance outside the United States.

platform employee

a bank employee whose primary function is to handle customer service issues and sell traditional bank products such as checking and savings accounts, but who is also licensed to sell insurance

financial consultant

A fnancial consultant is a full-time bank employee whose primary function is to sell investment products to bank customers. Financial consultants are licensed to sell securities as well as life insurance and annuities. Platform employees usually sell simple life insurance products such as term life and refer customers with more complex fnancial needs to fnancial consultants.

nonproprietary product

An insurance company can act as a distribution channel by selling nonproprietary products, which are products developed by another insurance company

Do this becauuse they can offer a new product without spending money to develop a product, enter a new market quickly, decrease risk,

5 Ways the home office supports insurance agents

1. Recruiting

2. licensing

3. training

4. sales support

5. marketing conduct monitoring

Mortality risk

the likelihood that a person will die sooner than statistically expected.


is the process of (1) assessing and classifying the degree of risk a proposed insured or group represents and (2) making a decision to accept or decline that risk

underwriting decision

The decision regarding the classifcation of a risk and the premium rate to charge

risk class

a group of insureds who represent a similar level of risk to an insurance company

new business processing

all of the activities required to process applications for insurance products, evaluate the risks associated with applications for life insurance, and issue policies.

electronic insurance application

s allow an applicant, sometimes in conjunction with a producer, to complete an application for insurance online and submit the application directly to the insurer’s new business processing system


allows the applicant to sign the application electronically.


the person clicks a secure, web-based “I agree” or “I accept” button on the electronic document.

exception based underwriting

rules are applied to process all applications except the most diffcult ones that require an underwriter to take part in the decision-making process.

straight through processing

the electronic processing of every step in the new business process without manual intervention. Pure STP would result in a paperless environment in which all forms and records are maintained electronically and the computer system makes the majority of underwriting decisions.


refers to whether a particular insurance or annuity product is an appropriate purchase for an applicant based on the applicant’s needs and fnancial condition

jet unit

a team authorized to immediately approve individual insurance applications that satisfy certain minimum qualifcations. All applications that are not issued for immediate coverage are sent from the jet unit to other underwriting staff.

underwriting philosophy

a set of objectives for guiding all of an insurer’s underwriting actions.

underwriting guidelines

standards that specify the limits within which proposed insureds may be assigned to one of an insurer’s risk classes established for each insurance product.

preferred class

s proposed insureds whose anticipated mortality is lower than average and who represent the lowest degree of mortality risk.

standard class

s designates proposed insureds whose anticipated mortality is average.

substandard class

designates proposed insureds whose anticipated mortality is higher than average, but who are still considered to be insurable.

declined class

designates proposed insureds whose anticipated extra mortality is so great that the insurer cannot provide coverage at an affordable cost or whose mortality risk cannot be predicted because of recent or unusual medical conditions or other risk factors


the process of approving an application but at a higher-than-average premium rate or with a modifed type or amount of coverage. F

field underwriting

When producers gather initial information about applicants and proposed insureds,

field underwriting manual

which presents specifc information that guides a producer in (1) assessing the risks a proposed insured represents and (2) assembling and submitting the application as well as any required evidence of insurability.

evidence of insurability

documentation that the proposed insured appears to be an insurable risk

table of underwriting requirements

The table of underwriting requirements specifes the kinds of information needed to assess the insurability of a proposed insured

agent's statement

A producer may report, in the portion of the application called the agent’s statement, additional information that he thinks could affect the underwriting decision


a method by which a home offce employee or a vendor, rather than the producer, gathers most or all of the information needed for underwriting.

nonmedical supplement

contains the proposed insured’s answers to medical history questions recorded by a producer or teleunderwriter at the time of application

paramedical report

contains (1) the proposed insured’s answers to medical history questions recorded by a paramedical examiner and (2) the results of an examination that a paramedical examiner conducts

medical report

a report of the insured’s health that both the proposed insured and a physician complete.

MIB group inc

not-for-proft membership corporation established to provide coded information to insurers in Canada and the United States about medical conditions that applicants have disclosed or other insurance companies have detected in connection with previous applications for insurance.

attending physician's statement (APS)

, is a report by a physician who has treated or is currently treating a proposed insured.

specialized medical questionnaire

Sometimes physicians are asked to complete a specialized medical questionnaire, which is a document that requests detailed information about a specifc illness or condition from a proposed insured’s attending physician or a physician who has examined the proposed insured at the request of the insurance company

pharmaceutical database

provide insurers with prescription histories for proposed insureds that are indicative of what conditions the proposed insureds have or what treatments have been prescribed.

financial underwriting

Financial underwriting is an assessment to determine whether (1) the proposed insured needs the coverage applied for, (2) a reasonable relationship exists between the need for the coverage and the amount of coverage applied for, and (3) the applicant can afford the coverage

personal underwriting

Personal underwriting analyzes those lifestyle choices that can signifcantly affect the probable length of a person’s life.

numerical rating system

a risk classifcation method in which a number—a numerical rating—is assigned to an individual proposed insured according to the degree of risk he represents to the insurer.

debits and credits

The numerical rating system uses debits and credits. A proposed insured’s medical and personal risk factors that have an unfavorable effect on mortality are assigned “plus” values (such as +25) and are called debits. Medical and personal risk factors that have a favorable effect on mortality are assigned “minus” values (such as –25) and are called credits.

table rating method

premium charges are determined by dividing substandard risks into broad groups or tables according to their numerical ratings.

flat extra premium method

An alternative method of charging for substandard risks is the flat extra premium method, in which the insurer adds to the standard premium rate a specifed extra dollar amount for every $1,000 of life insurance.

audit log

Automated workfow systems that route documents automatically to staff members for underwriting provide an important control feature in that they create an audit log, which is a record of work completed.

group member

In group insurance, the individual members of a group are called group members

naic group life insurance model act

defnes the types of groups eligible for group life insurance and sets forth provisions that group insurance policies must contain

group representative

who are salaried insurance company employees specifcally trained in the techniques of marketing and servicing group products, market most group policies.

proposal for insurance

A document that details the specifcations of a group insurance plan proposed by an insurer for a group prospect

master application

An application for group insurance that contains the specifc provisions of the requested plan of insurance and is signed by an authorized offcer of the proposed policyholde

master group insurance contract

A legal document that certifes the relationship between the insurer and the group policyholder and specifes the contract’s benefts, typically referred to as the group insurance policy or group plan. Only the insurer and the group policyholder, and not the group insureds, are parties to the master group insurance contract.

certificate of insurance

A document that describes (1) the coverage that the master group insurance contract provides to the group insureds and (2) the group insureds’ rights under the contract

group insured

Group members who are covered by the insurance contract are called group insureds.

FCRA Fair credit reporting act

The U.S. federal Fair Credit Reporting Act (FCRA) regulates the reporting and use of consumer information and seeks to ensure that consumer reports contain only accurate, relevant, and recent information.

consumer reporting agency

A consumer reporting agency is a private business that assembles or evaluates information on consumers and furnishes consumer reports to other people and organizations in exchange for a fee

Gramm leach bliley act

is a U.S. federal law that requires insurance companies to respect customers’ privacy and to protect the security and confdentiality of those customers’ nonpublic personal information.

NACI model privacy act

a model law that establishes standards for the collection, use, and disclosure of information gathered in connection with insurance transactions.

Personal information protection and electronics document act

In Canada, the federal Personal Information Protection and Electronics Document Act (PIPEDA) governs the collection, use, and disclosure of personal information by organizations in the private sector.

Claim administration

is the insurance function that is responsible for evaluating, processing, and paying valid claims for contractual benefts that policyowners or benefciaries present

claim analyst

is an insurance company employee who is trained to review individual claims and determine the company’s liability under each claim.


a person—usually a benefciary or policyowner— who submits a life insurance policy claim to the insurance company.

claim philosophy

a statement of the principles the insurer follows when conducting claim administration

claim practices

statements that guide claim department employees in the day-to-day handling of claims.

claim form

provides information about the loss and authorizes others to provide the insurer with relevant information so that the insurer can begin the claim evaluation process

claim fraud

Claim fraud occurs when the claimant intentionally uses false information in an unfair or unlawful attempt to collect benefts under an insurance policy.

mistaken claim

A claim is considered to be a mistaken claim when a claimant makes an honest mistake in presenting a claim to the insurer


The legal process of voiding an insurance contract because of material misrepresentation is known as rescission

contestable period

a period following policy issuance during which the insurer has the right to rescind the policy if the application for insurance contained a material misrepresentation

claim investigation

the process of obtaining the additional information necessary to make an appropriate claim decision.

death certificate

a document that attests to the death of a person and that bears the signature


—provisions that describe circumstances under which the insurer will not pay the policy’s proceeds following the death of the insured

suicide exclusion

, if the insured dies as a result of suicide within a certain period—usually one or two years from the date the policy was issued—the insurance company does not have to pay the policy proceeds.

accidental death benefit

a supplementary beneft under which the insurer pays an amount of money in addition to the basic death beneft if the insured dies as a result of an accident.

retained asset account option (RAA)

the insurer pays the proceeds into an interest-bearing account in the payee’s name.


r, the insurer pays the policy proceeds to a court, advises the court that the insurer cannot determine who should receive the proceeds, and asks the court to determine the proper recipient or recipients

investigative consumer report

contains information obtained through personal interviews with an individual’s neighbors, friends, associates, or others who may have information about the individual. T

special investigative unit

a group of individuals who are responsible for detecting, investigating, and resolving claims.

unfair claims settlement practices act

t. This NAIC Act describes specifc actions that are considered unfair claim practices if done (1) in conscious disregard of the law or (2) so frequently as to indicate a general business practice.

annuity date

the date on which the insurer begins to make the periodic income payments under an annuity contract

Nonannuitized options

which are not linked to the life expectancy of any person, such as (1) lump-sum distributions, (2) fxed-period distributions, and (3) fxedamount distributions.

4 annuitized options

1. Life annuity: provides periodic payments only for as long as the annuitant lives.

2. Joint ad survivor life annuity: a life annuity that provides a series of periodic payments based on the life expectancies of two or more annuitants. Payments continue until the last annuitant dies.

3. Life income with period certain annuity: guarantees that annuity payments will be made throughout the annuitant’s lifetime and that payments will continue for at least a specifed period, even if the annuitant dies before the end of that period. If the annuitant dies before the specifed period expires, a contingent payee designated by the policyowner will receive annuity payments throughout the remainder of the specifed period.

4. Life income with refund annuity: provides annuity payments throughout the lifetime of the annuitant. This annuity provides a guarantee that at least the purchase price of the annuity will be paid out.

Work team

two or more people who work together on a regular basis and coordinate their activities to accomplish common goals.

customer contact center

provides customers with a variety of channels, such as telephone, fax, e-mail, Internet chat, and traditional mail, for communicating with a company.

seamless process

is a smooth process designed so that a customer is not inconvenienced by—or even aware of—the steps involved in fulflling the customer’s request

web callback

Web callback allows a customer to click on an icon at a website and request that a CSR call the customer on the telephone.

web collaboration

a technology that enables participants to “meet” at a website, synchronize their browsers, and explore the website together, communicating with each other in real time.

skill based routing

Insurers can provide faster and more personalized service through an automatic call distributor (ACD). The ACD can be programmed to route calls based on the skills necessary to process the request.

irrevocable beneficiary

a life insurance policy benefciary whose designation as benefciary cannot be cancelled by the policyowner unless the benefciary gives written consent.

producer of record

the agent, broker, or other type of producer currently providing service to the policyowner

orphan policyowner

Orphan policyowners, who do not currently have a relationship with a producer, are likely to surrender their policies or let them lapse

policy rider

an amendment to an insurance policy that expands or limits the benefts payable under the policy.

net cash surrender value

The owner of a cash value life insurance policy can surrender—terminate—his policy and receive an amount of money known as the policy’s net cash surrender value

partial surrender

In a partial surrender, the contract owner withdraws only a portion of the annuity’s accumulated value instead of surrendering the contract entirely


A replacement is the purchase of one life insurance policy or annuity contract using money received from the surrender of another life insurance or annuity contract.


reinstatement is the process by which an insurer puts back in force a policy that lapsed because of nonpayment of renewal premiums

complaint management system

the processes and procedures for recording, evaluating, and taking action on complaints.


The process of ensuring that policies do not lapse but remain in force as long as possible is called conservation

member services

most insurance companies that sell group products devote a segment of the customer service unit exclusively to group products. This unit is often called member services, and it engages in extensive recordkeeping activities.

moment of truth

Every contact between an insurer and a customer produces a moment of truth, an instant when the insurer has an opportunity to create a good or bad impression in the customer’s mind