Insurance Code
A body designed to protect insurance buyers. Regulated by state laws.
CIC: California Insurance Code
CCR: California Code of Regulations
Definitions
Investigative consumer report: that is your credit report, plus interviewing your neighbors and persons close to you. It has to be with your consent.
Contract: The policy itself. Two parts of the contract. The Insurer and the agent. It binds the Insurer to indemnify the Customer when loss occurs.
Insurer: The Insurance Company
Insolvent insurance company (bankrupt). Inability of insurer to meet their financial obligations when they are due. An insurance company cannot transfer all their risk to another insurance company.
Agent: Represents the Insurer, also called producer, or front line underwriter. Authorize all classes of insurance, other than life and health (property and casualty only). A life licensee can do both.
Insurance broker: can only be licensed in P&C (property and casualty). They represent the customer, as opposed to the insurance agents that represent the insurance company. It has to be bonded. In California there is a license requirement. When acting as a broker, you need to be acting in behalf of the customer.
Solicitor: also restricted to property and casualty. Hired by brokers. This kind of license is only for natural persons.
Customer: The insurance buyer
Loss: A claim
Natural person: an individual
Artificial person: a corporation or company
Independent agent: can represent several companies
Exclusive agent: usually salaried to just one insurance company
Producer: another name for an agent
Life licensee: transact life and health insurance. Can transact 24 hour care coverage (medical and worker’s comp).
Life settlement broker: acts in between life insurance policy holder and a life settlement provider (somebody who buys life insurance policies). They represent the insurance policy holder. They pay cash to the customer, and change the beneficiary to them. They are the new owner, and they have to pay the premiums. You still the beneficiary. They need a license in California.
Expressed authority: in the contract with the insurance company (how much commission, who owns the accts, etc)
Implied authority: authority to transact business in the name of the insurance company
Apparent authority: the authority your customers thing you have in behalf of the insurance company you sell for
Pre selection: agents have the opportunity to pre-select good risk. Make sure the applicant meets the guidelines of the insurance company
Post selection: done by the underwriter, who has more authority over the decision of issuing an insurance policy
24 hours care: certain policies cover you while at the job: occupational coverage. Others cover you while off the job. 24 hours care covers you everywhere.
Life only agent: can sell life or health insurance, or both.
Transact insurance: soliciting, negotiating, execution or handling things after. If you do any of those things, you do need to have a license.
Property Casualty: insurance broker can only be license in property and casualty
Prohibited person: cannot engage in insurance transactions. Person that in the past has validated federal law. It needs approval of the commissioner.
Professional liability: going beyond your authority . There is an insurance for that, so in case of error, the insurance will pay for it. Covers financial damages for mistakes (negligence).
Residual market: admitted or authorized companies that have license to do business in California. Others are called unauthorized. They are allowed to do business in California if the other companies that are admitted won’t take you.
Surplus line: the company must do business through their local surplus broker. You can’t use surplus line for low rates. Must conduct a search with insurance companies in the State, at least 3 insurers should decline before going to the surplus lines. The broker has to collect premium taxes in surplus lines. Therefore he has to have a 50K bond with the State, to guarantee he will pay the premium tax.
If the company is organized in California, it is called a domestic company.
A foreign company is incorporated in some other state.
An alien company is organized in another country.
All three can do business in California if they are admitted (licensed in California)
Records: you have to keep them for at minimum of 5 years. The application, the premium, correspondence.
Illustration: presentation of non guaranteed elements of a life insurance policy over a period of time. Types:
- basic: shows guaranteed and non guaranteed elements
- supplemental: only has the non guaranteed elements
- enforced: elements added after the insurance is in place
The law does not require illustration, but if it has some, it has to be one of the above.
Third Party Administration: run the self funded plans (handle claims, collect premiums, etc).
California has a sales tax on Insurance (Premium tax).
Underwriting: department that research and finds insurable risk. If too many claims, they raise the rates.
Morbidity table: predicts the likeness of sickness.
Lost ratio: claims as a percentage of premiums.
Ceding: Ceding is transferring. It has to do with passing part of the risk to another company (the ceding company). Take some of the premiums, and buy re-insurance. They don’t sell insurance to the public. They transfer out risk from other companies to themselves (for a fee, of course).
Conservation: the insurance company is going broke, the commissioner (if the superior court in the county approves), will try to save it, or conserve it.
non-guaranteed elements: for example dividends, since they can’t be guaranteed that they will be issued.
Mutual Company
They pay dividends to the policy holders, which are the owners of the company, they participate in the company profit, but the profit is not guaranteed. The difference between this and the Stock company is that the policy holders don’t get any dividends.
A fraternal company only sells life insurance.
Ethics
CIC: California Insurance Code. The insurance commissioner is elected by vote.
Pretext interview: pretend to be a person you are not. Use false information to obtain an interview. Making alterations without the content of the client is a misdemeanor.
Rates can be different for different groups as long as we can back it up with data. Example: young males have more accidents that women, therefore they get a higher car insurance rate.
Privacy protection: California Financial Information privacy act (SB1) and GLBA act (federal) protect the insurers privacy. The California law expand the protections of the Federal Law.
Fair Credit reporting law (federal): regulates the procedures used for collection, use and disclosure of customer’s personal information.
Risk
The chance of loss. Insurance is the transfer of risk.
Pure risk: the chance of loss but no chance for gain.
Speculative risk: the chance of loss, but also the possibility of gain (casino like). You can’t insure that.
Peril: Cause of loss (death, fire, sickness). Some policies cover just one peril. Health insurance covers several perils. Or all (open peril).
The Insuring Agreement has a list of all the perils covered.
Hazard
Something that increases the risk. It usually represents a higher premium. The types of hazard:
- Physical.
- Moral.
- Morale hazard: a careless person.
The underwriter is to approve policies for the insurance company, they are reviewing the risk. The underwriter may bounce policies asking for more money. He makes the decision to take an insurance policy.
Loss exposure: something that people are exposed to over a period of time.
Mortality table and the law of large numbers
1980 is the most common one
2001 is the most recent
Tracks 10 million people by age. It will tell us things like how many people are going to die this year, per age.
At age 100 all die, so the table reaches maturity.
You can’t insure a small number of people without losing money. That is the law of large numbers. That happens when the premiums can’t cover all the claims.
Risk management
Ways to manage risk:
- avoid risk
- reduce risk
- retain risk (keep doing the same risk activities as before)
- transfer risk (buy insurance)
Requisites of an ideal insurance
- Large number of similar people you can insure
- The lost must be ascertainable (you can put a dollar value on it)
- The lost must be uncertain (if you know you will get a loss, you can’t try to sign up for insurance (adverse selection)
- Earthquake, floods, and hurricanes are excluded (or they will be charging extra). They are catastrophic events.
- The insurable event must be contingent (it may happen, not it will happen)
Hippa prohibits discrimination under pre-existing conditions
Insurable interest
That means you can insure somebody else (besides yourself) if you have insurable interest on them: direct family members or business partners.
The insurable interest must exist at the time of the application (third party ownership), but it doesn’t need to exist at the time of loss (for life insurance).
Indemnity: to pay, to indemnify. The purpose of insurance is to make you whole again by paying the claim, to restore you to the position you were. It also means we are not going to pay more than the house is worth.
The doctrine of outmost good faith
The insurance company assumes that everybody is honest.
Underwriting
Risk classification. Putting the client in a particular risk category.
Usually there are three classifications here:
- Premium (the best customers, low risk)
- Standard risk (most of the customers fit here)
- Sub-standard (most risky customers)
Profitable distribution of exposures
The risk is transferred from the individual to the group (pooling concept).
Contract law
The insurance is a contract. Insurance are unilateral. It is a two party contract, but only one party is bound to act (only one party has an enforceable promise.
Bridge of contract: an area of civil law, an insurance don’t want to pay for example on a contract, and they get sue.
Tort law: injury lay. When the insured negligently commits an accident. The injured party could file a law suite (the plaintiff), usually they sue for negligence (failure to act as a reasonable person).
The four requirements of a legal contract:
Consideration: exchange of value, you pay a premium, you get coverage
Offer: the customer is offering to buy
Acceptance: made by the underwriter. If all checkout, they will issue the policy (mutual agreement of the parties, or meeting of the minds)
Legal purpose: no contact is enforceable in court, if it was written for illegal purposes. Also, the parties have to be in legal capacity (the parties have to be of legal age and capacity in order to enter a contract).
Adhesion: derivative of adhere, to stick to it.
Miss representation: lying about a material fact. In the first two years, the in con testability clause allows the insurance company to challenge the validation of a claim based on miss representations. Agents can also miss-represent: it is called twisting.
Pay dividends back to customers: money back to the customer, but it is not guaranteed.
Implied guarantee: it is not written down, it is implied
Rescission: void the policy. Could be done because of concealment of any of the parties, a judge order, or agreement of both parties..
Requirements for insurance policies
The parties between whom the contract is made
The property or life insured
The interest of the insured
If he or she is the absolute owner or not
The risk insured
The policy period
A statement of the premium, or a statement of the basis and rates upon which the final premium is to be determined.
Rider (for life and health) or endorsement (for property)
Something that cost extra premium, but makes an insurance better. For example: a life policy of 100K, with a rider that says if I die by accident my beneficiary will get double. Sometimes is called double indemnity. You can have more than one rider.
Cancelation
Lapse: cancellation for not payment.
Grace period (generally 30 days), you still cover, they will pay the premium, but they will subtract what you owe.
Rate
Cost per Unit. For example, for 10K coverage, the rate is $10. So in a 100K coverage policy, the premium will be $100.
Types of agents
Accident and health.
Long Term Care insurance
Pay a monetary daily benefit for staying at a nursing home. It usually pay for a period of years. It won’t cover you forever.
If you have life insurance, you can add it as a rider to have accelerated benefits.
Accelerated benefits: take money will be taken off my death benefits, it reduces the benefit by that amount.
Generic Underwriting: you can’t discriminate based on genetic information.
A response to a claim has to be done within 21 days of received. There has to be a written notice provided if more than 21 days are needed.
