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Chapter 1 Basic Principles of Life and
Health Insurance and Annuities
(2024/2025) Rated A+
Role of Insurance ✔✔To transfer the risk of financial loss from an individual or business to an insurance company.
Annuities ✔✔Provide a stream of income by making a series of payments to the annuitant over a certain period of time.
Commercial Insurers ✔✔are in the business of selling insurance for a profit. These insurances are divided into two main groups: stock and mutual insurers.
Multi-line Insurer ✔✔An insurance company selling more than one line of insurance.
Stock Companies (Non-par) ✔✔owned by stockholder, who get paid a share of the company's profit through dividends. Policyholders are not paid dividends.
Mutual Companies (Par) ✔✔Have no stockholders, instead the policyholders own the company. Owners get paid a share of the company's profits through dividends.
Mutualization ✔✔The process of a stock company being converted into a mutual company
Demutualization ✔✔The process of mutual company being converted into a stock company.
Participating Insurers ✔✔Mutual Insurers policyholders participates in receiving dividends.
Nonparticipating Insurer ✔✔Stock insurers policyholders do not participate in receiving dividends, unless they are also a stockholder of the company.
Mixed Insurer ✔✔A company that operates as both a participating and nonparticipating Insurer.
Strong Assessment Mutual Companies ✔✔Are classified by the way they charge premium.
Pure Assessment Mutual Company ✔✔Operates on the basis of loss-sharing by group members. No premium is payable in advance. Instead, each
member is assessed an individual portion of losses that actually occur.
Primary Insurer ✔✔In a reinsurance agreement, the insurance company that transfers it's loss exposure to another insurer is called the?
Ceding Company ✔✔The Insurance Company that transferring the risk.
Captive Insurer ✔✔an insurer owned by a parent firm for the purpose of insuring the parent firm's loss exposures
Home Service Insurers ✔✔Insurer selling industrial/ordinary life insurance or accident/sickness insurance on a debit. Face amount are small and premiums are paid weekly.
Government Insurance ✔✔Provides social insurance programs such as: Medicare, social security, Medicaid.
Self-Insurer ✔✔Retain risk and must have a large number of similar risk and enough capital to pay claims.
Self-funded Plan ✔✔A plan in which an employer pays insurance benefits from a fund derived from the employer's current revenues.
Lloyd's of London ✔✔not an insurer, but a society of members who underwrite and issue insurance like coverage on certain items and areas that might otherwise be uninsurable.
Distribution Systems ✔✔Are the ways Insurance products are marketed and sold to the public.
Career Agency System ✔✔Branches of major stock and mutual insurance companies that are contracted to represent an insurer in a specific area. All producers under the this system are captive agents and employees of the Insurer.
Personal Producing General Agent ✔✔Agents work for an independent agency selling policies from several insurance companies. Agents primarily sell insurance, instead of recruiting and training new agents as in the career agency system.
Independent Agency System (American Agency System) ✔✔Agents represent a number of insurance companies under separate contractual agreements. They are compensated on a commission/fee-basis for the business they produce.
1970 Fair Credit Reporting Act ✔✔provides individuals privacy protection and fair and accurate credit reporting. Insurance companies are required to notify applicants if a credit check will be made on them. Maximum penalty of a producer who has obtained consumer info reports under false pretenses is fine $5,000.
1999 Gramm-Leach-Bliley Act ✔✔Repealed the Glass-Steagall Act. This allows banks, retail brokerages and insurance companies to enter each other's line of business.
2001 USA Patriot Act ✔✔It's designed to detect and deter terrorists and their funding by imposing anti-money laundering requirements on brokerage firms and financial institutions.
2003 National Do Not Call Registry ✔✔Insurance calls are not exempt from the no not call registry.
2010 Patient Protection and Affordable Care Act ✔✔Makes preventative care more accessible and affordable for many Americans
National Association of Insurance Commissioners (NAIC) ✔✔An organization composed of Insurance commissioners that are responsible for recommending appropriate laws and regulations.
NAIC Four Broad Objectives ✔✔1. To encourage uniformity in state insurance laws and regulations
- To assist in the administration of those laws and regulations by promoting efficiency
- To protect the interest of policy owners and consumers
- To preserve state regulation of the insurance business
Advertising Code ✔✔Specifies certain words and phrases that are considered misleading and are not to be used in advertising of any kind
Unfair Trade Practices Act ✔✔Gives chief financial officer the power to investigate insurance companies and producers to impose penalties.
National Association of Insurance and Financial Advisors (NAIFA) ✔✔Members of this organization are life and health agents dedicated to supporting the industry and advancing the quality of service provided by insurance professionals.
Reserves ✔✔are the accounting measurement of an insurer's future obligations to its policyholders.
Liquidity ✔✔An insurer's ability to make unpredictable payouts to policy owners.
Guaranty Association ✔✔Established by all states to support insurers and protect consumers in case an insurer becomes insolvent.
Independent Rating Services ✔✔are credit rating agencies that rate or "grade" the financial strength and stability of insurers based on claims, reserves, and company profits.
