LOMA 280

Principles
of
Insurance

CHAPTER 2

The Life and Health Insurance

Industry

CHAPTER TW0 1
Chapter 2

Types of Business Organization

Sole Proprietorship

Partnership

Corporation

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Chapter 2

Types of Insurance Co. Organization

Stock Insurance

Mutual Insurance

Fraternal Benefits Societies

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 Chapter 2

Insurance Co. as Financial Institutions

Financial Institution:- is business that owns primarily financial assets
such as stock and bonds than fixed assets.
Financial Service Industry:- is made up of various kinds of financial
institutions that help in saving, borrowing, investing and otherwise
managing money. In addition to insurance companies, other financial
institutions include the following:

 Depository Institutions:- which accepts deposits from and make

loan to the people, businesses and government agencies.
 Finance Companies:- Specializes in making short and medium
term loans to people and business.
 Security Firms:- specializes in purchase and sell of securities.
 Mutual Fund Companies:- which operate mutual fund.

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Chapter 2

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 powers.
 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—commerce conducted across
state lines—which includes the power to regulate 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.

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Chapter 2

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. Market Conduct Regulation

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Chapter 2

Regulation of Insurance
Solvency Regulation
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.

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Chapter 2

Regulation of Insurance
Basic accounting equation
Assets = Liabilities + Owners’ equity
all things of the the difference
value owned company’s between the
by the debts and amount of the
company future company's assets
obligations and the amount of
its liabilities
(owners’ equity
represents the
owners’ financial
interest in the
company)
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Chapter 2

Regulation of Insurance
Assets  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.

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Chapter 2

Regulation of Insurance
Liabilities  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 of their policy
reserves.

Owners’  Owners’ equity in a stock insurance company

Equity 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.
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Chapter 2

Regulation of Insurance
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.
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Chapter 2

Regulation of Insurance
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.

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Chapter 2

Regulation of Insurance
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.
To obtain a producer's license, an individual usually must
 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.

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Chapter 2

Regulation of Insurance

Social
SocialInsurance
InsurancePrograms
Programs
1.1. Welfare
Welfareprogram
program
2.2. Provide
Provideincome
incomesecurity
security

Taxation
Taxation

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Chapter 2

End of Chapter 2

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