The Life and Health Insurance Industry
Role of Government in Insurance
The United States has a federal system of government in which the federal government and a
number of lower level governments, known as state governments, share governmental
；According to the U.S. Constitution, all governmental powers not specifically given to the federal government are left to the state governments.
；One power delegated to the federal government is the authority to regulate interstate
commerce conducted across state lines—which includes the power to regulate commerce—
the insurance industry.
；However, in enacting the federal McCarran-Ferguson Act, or Public Law 15, the U.S.
Congress agreed to leave insurance regulation to the states as long as Congress considered state regulation to be adequate.
Regulation of Insurance
In most countries, the two primary goals of insurance regulation are to ensure that insurance companies
1.Remain solvent—able to meet their debts and pay policy benefits when policy benefits come due
2.Conduct business fairly and ethically
In the United States, each state has enacted laws designed to ensure that insurance companies operating within the state are solvent
；To achieve that goal, the state imposes minimum requirements on the amount of the insurer’s assets, liabilities, capital, and surplus.
；These amounts represent components in the company’s basic accounting equation, under which the company’s assets must equal its liabilities and owners’ equity.
Basic accounting equation
Assets = Liabilities + Owners’ equity
；Examples of assets include cash and investments.
；States regulate types of investments insurance companies can make to ensure that investments are conservative and prudent.
；States also impose requirements on how insurers must determine the value of their assets.
；A large portion of an insurance company’s liabilities consists of the company’s policy
reserves, which represent the amount the insurer estimates it will need to pay policy benefits as they come due.
；States impose requirements on the methods that insurers use to calculate the amount oftheir policy reserves.
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；Owners’ equity in a stock insurance company consists of the company’s capital and surplus.
；Capital: the amount of money invested in the company by its owners
；Surplus: the amount by which the company’s assets exceed its liabilities and capital
；Because a mutual insurer does not issue stock, it has no capital, and, therefore, owners’ equity in a mutual company consists only of its surplus.
States oversee the financial condition of insurance companies by reviewing the companies’ Annual Statements:
Annual Statement: an accounting report that an insurer prepares each calendar year and files with the insurance department in each state in which it operates
The NAIC has developed an Annual Statement form that is accepted by all states so that an insurer can file the same form in all the states in which it operates.
State regulators also conduct an on-site financial condition examination of each insurance company every three to five years.
；State regulators have discretionary authority to conduct more frequent examinations of companies that appear most likely to have financial difficulties.
；The NAIC has developed an organized system of on-site examinations to coordinate this function between states to avoid duplication of effort by the various states. Relatively few insurance companies become financially unsound. When such a situation does occur, state insurance commissioners have the authority to take certain actions
If a domestic insurer—an insurer incorporated by the state—becomes financially unsound,
the insurance commissioner can take steps to either rehabilitate or liquidate the company
；If the company’s finances can be turned around, the commissioner will try to rehabilitate it.
；If the company is too financially unsound, the commissioner may declare the company insolvent and act to liquidate—dissolve—the corporation.When a foreign insurer—an insurer
incorporated under the insurance laws of another state—becomes financially unsound, the
insurance commissioner has the authority to revoke or suspend the insurer’s license to operate in the state.
In the United States, a life and health guaranty association is an organization that operates
under the supervision of the state insurance commissioner to protect policyowners, insureds, beneficiaries, and specified others against losses that result from the financial impairment or insolvency of a life or health insurer that operates in the state.
；Typically, a guaranty association provides funds to guarantee payment for certain policies up to stated dollar limits.
；In some cases, a policyowner may have the option to obtain a replacement policy. ；To pay these obligations, the guaranty association requires all life and health insurers operating in the state to pay money into a guaranty fund.
Market Conduct Regulation
In the United States, each state has enacted market conduct laws that regulate how
insurance companies conduct their business within the state.
State insurance regulators perform periodic market conduct examinations of insurers similar to financial condition examinations.
States require that all individuals—known as insurance producers—and agencies that market
and sell insurance must be licensed by each state in which they conduct business.
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；Be sponsored for licensing by a licensed insurer
；Complete approved educational course work and/or pass a written examination ；Provide assurance that he is of reputable character
Producer's licenses typically must be renewed every year, and many states require producers to participate in continuing education courses to renew their licenses.A state may revoke or suspend a producer's license if she engages in certain unethical practices, such as some form of misrepresentation in which the producer deliberately makes false or misleading statements to induce a customer to purchase insurance
Each state also regulates the policy forms that insurers may use within the state. policy form:
a standardized form that shows the terms, conditions, benefits, and ownership rights of a particular type of insurance product
；An insurer usually must file with the state insurance department a copy of each policy form it plans to use and must receive the department's approval before using the form. ；Many states impose readability requirements on insurance policies to reduce the amount of technical jargon and legal language included in those policies.
Canada has a federal system of government in which powers are shared between a federal government and a number of lower level governments known as provincial governments.
；Although similar to the U.S. regulatory system, the Canadian insurance regulatory system provides a more prominent role for the federal government than does the U.S. system.
；In Canada, insurers can be federally incorporated or provincially incorporated
Canadian Life and Health Insurance Compensation Corporation
The Canadian Life and Health Insurance Compensation Corporation (CompCorp) is a
federally incorporated, nonprofit company established by the insurance industry to protect Canadian consumers against loss of benefits in the event a life or health insurance company becomes insolvent.
；All insurers operating in Canada are required to become members of CompCorp.
；CompCorp guarantees payment under covered policies up to certain specified limits.
Introduction to Risk and Insurance
The Concept of Risk
Risk exists when there is uncertainty about the future. Individuals and businesses experience two kinds of risk
Speculative risk involves three possible outcomes: (1) gain, (2) loss, or (3) no change.
Pure risk involves no possibility of gain; either a loss occurs or no loss occurs
The possibility of financial loss without the possibility of gain—pure risk—is the only kind
of risk that can be insured.
The purpose of insurance is to compensate for financial loss, not to provide an opportunity for financial gain.
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Risk management involves identifying and assessing the risks we face.
Four risk management techniques that people and businesses can use to eliminate or reduce their exposure to financial risk are:
1. Avoiding the risk
2. Controlling the risk
3. Accepting the risk
4. Transferring the risk
Characteristics of Insurable Risks
Insurance products are designed in accordance with basic principles that define which
a potential loss—to be considered insurable, it must have risks are insurable. For a risk—
1.The loss must be definite.
2.The loss must be significant.
3.The The loss must occur by chance.
4.loss rate must be predictable.
5.The loss must not be catastrophic to the insurer
；These five basic characteristics define an insurable risk and form the foundation of the business of insurance.
；A potential loss that does not have these characteristics generally is not considered an insurable risk.
1. The loss must occur by chance. For a potential loss to be insurable, the element of chance must be present.
The loss should be caused either by an unexpected event or by an event that is not intentionally caused by the person covered by the insurance.
For example, people cannot generally control whether they will become seriously ill; as a result, insurers can offer medical expense insurance policies to protect against financial losses caused by the chance event that an insured person will become ill and incur medical expenses.
When this principle of loss is applied in its strictest sense to life insurance, an apparent problem arises: death is certain to occur. The timing of an individual’s death, however, is
usually out of the individual’s control and, therefore, usually occurs by chance.
2. The loss must be definite. For most types of insurance, an insurable loss must be definite in terms of time (when to pay policy benefits) and amount (how much those benefits should be).
Because death, illness, disability, and retirement are generally identifiable conditions, insurers