Introduction to Insurance Concepts

What is Insurance?

• A legal agreement for managing uncertain risks.
• Policyholders pay premiums to transfer the risk of financial loss to the insurer.
• In case of a covered event, the insurer pays out to cover the losses.

Types of Insurance Companies

• Stock Companies: Owned by stockholders who share in profits.
• Mutual Companies: Owned by policyholders who share in profits through dividends.
• Assessment Mutual Insurers: Premiums charged only after losses, some have no upfront premiums.
• Fraternal Benefit Societies: Non-profit groups offering insurance and charity to members with shared interests.
• Reciprocal Insurers: Members share risks and benefits, managed by an attorney.
• Risk Retention Groups (RRGs): Provide coverage for members with similar needs.
• Risk Purchasing Groups (RPGs): Collectives that buy insurance for their members.
• Reinsurers: Insure other insurance companies against large risks.
• Surplus Lines Carriers: Offer coverage when traditional insurers decline.
• Captive Insurers: Created to cover parent company's risks.
• Self-Insurers: Set aside funds to cover their own losses, may have stop-loss insurance.

Insurers by Authorization

• Authorized Insurers: Licensed to operate in specific states.
• Unauthorized Insurers: Not allowed to operate in certain states.

Insurers by Domicile

• Domestic Insurers: Based in the state where they operate.
• Foreign Insurers: Based in a different state.
• Alien Insurers: Based in another country.

Departments in an Insurance Company

• Marketing/Sales: Find new customers.
• Sales: Work directly with clients on applications.
• Underwriting: Evaluate risks and decide coverage.
• Claims: Handle policyholder claims.
• Actuarial: Calculate rates and reserves for insurance policies.

Key People in an Insurance Company

• Producers: Licensed individuals or organizations that sell insurance.
  • Agents: Represent insurers.
  • Brokers: Represent clients.
• Underwriters: Assess risks and determine insurance costs.
• Adjusters: Investigate and settle claims.

How Insurance is Sold

• Most U.S. insurance is sold by licensed agents.
• Different sales systems:
  • Career Agency System: Agents work for a specific company.
  • Personal Producing General Agency System: Focus on sales, not agent training.
  • Independent Agency System: Agents represent multiple companies.

Insurance Industry Regulation

• Historical Cases: Early cases established state rights to regulate insurance. Later rulings recognized insurance as interstate commerce.
• McCarran-Ferguson Act: Allows states to regulate insurance while adhering to federal standards.
• Consumer Protection Laws: Protect consumer privacy and ensure fair insurance practices.

National Association of Insurance Commissioners (NAIC)

• Helps states create consistent insurance regulations.
• Ensures fair practices and protects consumers.
• Oversees advertising practices.
• Investigates unfair activities in the industry.

Explore the fundamentals of insurance, including its definition, purpose, and various types of insurance companies. This quiz covers the essential aspects of how insurance functions as a risk management tool and the differences between stock and mutual companies, as well as other unique organizational structures.