|
Module 2
General Insurance Concepts
|
 |
|
|
|
Insurance is provided to the public by three major sources:
•Service Providers
•Government
•Private Commercial Insurers
|
 |
|
|
|
Service Providers
Some organizations resemble private insurance companies by offering protection against the financial loss caused by illness and accidents. However, in key respects these organizations are quite different from private insurers.
Examples of service providers are health maintenance organizations (HMOs) and preferred provider organizations (PPOs).
Service providers will be discussed in detail later in this text.
|
|
|
|
|
|
Government Insurers
The federal government offers a variety of military life and health insurance plans (SGLI, or Servicemen's Group Life Insurance, Tricare and CHAMPUS) as well as Medicare which is the health insurance part of Social Security. At the state level, governments are involved in providing unemployment insurance, workers compensation programs, and state-run medical expense insurance plans (Medicaid).
Federal, state, and local governments provide social insurance to a segment of the population who would otherwise be without coverage.
|
|
|
|
|
|
Private Commercial Insurers
Private insurers may be organized as stock companies, mutual companies, reciprocal insurers or fraternal organizations.
An insurance company intending to do business in any given state must be authorized by the state department of insurance. Once satisfied that the insurer meets the state's standards of financial strength and allowing them the opportunity to sell insurance in the state doesn't jeopardize the public interest, they will grant the insurer a certificate of authority (the insurer will be admitted or authorized).
|
|
|
|
|
|
Stock Companies
Companies that are structured in a traditional corporate manner are called stock companies. These companies are owned by stockholders who may or may not be policy owners. Profits made by a stock company are passed on to the stockholders in the form of dividends. Most life insurance companies today are stock companies, but most of the in-force life insurance is held by mutual companies.
Mutual Companies
A mutual insurance company is owned by its policy owners. It is structured as a
|
|
|
|
|
|
corporation, with the exception that ownership in the company is evidenced through ownership of a policy, not a stock certificate. Earnings from a mutual company's operations are passed on to the policy owners in the form of policy dividends. Mutual companies distribute policy dividends through participating policies. This term reflects the fact that policy owners participate in the earnings of the company.
Stock companies generally issue only non-participating policies, meaning that policy owners do not share in company profits.
|
|
|
|
|
|
Reciprocal Insurers
Through individual indemnity agreements certain groups of people provide insurance for one another. Each insured of the reciprocal is called a subscriber. Each subscriber is allocated a separate account where his/her premiums are paid and interest earned is tracked. If any subscriber suffers a loss covered by the reciprocal insurance, each subscriber’s account would be charged an equal amount to pay the claim. The party who acts as principal of a reciprocal insurance company is known as an attorney-in-fact.
|
|
|
|
|
|
Fraternal Organizations
A fourth type of organization in the business of issuing life and health insurance is the fraternal organization. A fraternal organization is a non-profit entity that sells only to its members, and that must be created for some purpose other than selling insurance.
These organizations must have a representative form of management with elected officers. A distinguishing characteristic of fraternal life insurance is the open contract, which allows fraternal insurers to assess their policyholders in times of financial difficulty.
|
|
|
|
|
|
Lloyd’s of London is not an insurance company, but is similar to a stock exchange. Just as an exchange provides facilities for its members but does not buy or sell securities itself, Lloyd’s provides a meeting place to its members who actually transact the business of insurance.
Members may be individuals or corporations and are grouped into syndicates, but they remain individually liable and responsible for the contracts of insurance they enter into. For some risks, the only market may be with specialty carriers.
|
|
|
|
|
|
Excess and surplus lines is the name given to insurance for which there is no market or insurance available through authorized carriers in the state where the risk arises or is located.
Reinsurers Reinsurance is a contract between insurers that exists when one insurer (the reinsurer) agrees to accept a portion of a risk covered by another insurer (typically a smaller company).
The ceding company is responsible for any coverage it has written, but will have a legitimate claim against the reinsurer for any portion of its loss that is reinsured.
|
|
|
|
|
|
**Note**
The only insurers exempt for obtaining a certificate of authority prior to transacting business in any particular state are Excess and Surplus lines brokers and Reinsurers.
*********************************
Another method of categorizing private insurers that disregards whether they are a stock, mutual, reciprocal or fraternal organization relates to the regulation of insurers.
|
|
|
|
|
|
To better understand this concept, it is important to know that the insurance industry is regulated primarily at the state level (not federal) and insurers can be categorized by their state of domicile.
After it was established that insurance transacted across state lines was interstate commerce, the McCarran-Ferguson Act was drafted to give the federal government the right to regulate insurance, but only to the extent that the state does not.
|
|
|
|
|
|
An insurance company headquartered and chartered in the state in question is a domestic insurer.
For example, XYZ Life Insurance Company is headquartered in Arizona. In Arizona, XYZ Life Insurance Company is a domestic insurer. A company whose home office is in another state is a foreign company.
Using the example from above, XYZ Life Insurance Company is a foreign company in Vermont. A company headquartered in another country is an alien company. XYZ Life Insurance Company would be considered an alien insurer in Canada.
|
|
|
|
|
|
Producers may function as agents, representing the insurance company, or as brokers, representing the potential insured.
Agency System
Generally, life and health insurance agents represent the insurer with respect to the sale of life and health insurance products.
Agents are appointed by the insurer through a written agreement (contract) which outlines the agent’s authority to represent the insurer.
|
|
|
|
|
|
The acts of an agent are considered to be the acts of the company.
An application taken by the agent is considered an application taken by the company. Payments made to the agent are considered as being made to the company and knowledge of the agent is considered knowledge of the company.
Brokers In contrast to the agency system in which the agent represents the insurer, a broker represents the applicant. A broker may do business with several different insurers.
|
|
|
|
|
|
Brokers are independent sales representatives who select the most appropriate insurance coverage from various companies for their clients.
Brokers must be licensed, and generally their routine activities and functions are similar to that of agents.
|
|
|
|
|
|
Solicitors
A solicitor is a person who works for an agent or a broker. The solicitor’s primary functions are to solicit insurance, collect initial premiums, and deliver policies. Solicitors cannot bind coverage.
Direct Writing Companies
Call centers and internet-based insurers pay salaries to employees who sell the company’s insurance products. Technically, these salaried employees are not producers, but they must be licensed nonetheless.
|
|
|
|
|
|
Direct response marketing is conducted through the mail, by advertisements on television and radio, and in newspapers and magazines. Policies sold using this method typically have limited benefits and low premiums.
Non-insurance Sponsors
Non-insurance sponsors are being used more and more. Examples include banks offering credit insurance, credit card companies offering unemployment insurance and vending machines in airport terminals offering travel accident insurance.
|
|
|
|
|
|
A producer’s actions and knowledge are binding on the insurance company he/she represents. The actions of a producer can take on 3 types of authority: Express, Implied & Apparent.
Express authority is a written agreement. It is the authority the insurer gives the producer in writing. It is typically in a contract of employment. Implied authority is given by an insurance company to an agent and is not actually expressed in writing or otherwise communicated. This authority allows the agent to perform all the usual and necessary tasks to sell and service an insurance policy and to exercise the agent's expressed authority.
|
|
|
|
|
