Chapter 1 (7)
Life Insurance Company Operations (7)
Financial Institutions (7)
Roles of Life Insurance Companies (9)
Life Insurance Company Operations (9)
Risk Management (9)
Strategic Planning (10)
Strategic Alliances and Outsourcing (11)
Chapter 2 (12)
Competition, Regulation, and Ethics in the Lift Insurance Industry (12)
The U.S. Regulatory System (12)
State Regulation (12)
The NAIC (12)
U.S. Federal Regulation (13)
Federal Regulation Affecting Insurance (13)
Reforms in the U.S. Regulatory System (13)
Insurance Product Sales Competition (13)
Canadian Regulatory System (14)
Other Canadian Regulation (14)
Solvency (14)
Asset, Reserve, and Capital Requirements (15)
Financial Statement Reviews and Financial Condition Examinations (15)
Market Conduct Regulation (16)
Licensing and Policy Forms (16)
Promotion (16)
Sales Practices (17)
Consumer Privacy (17)
Complaint Management (17)
Ethics (18)
Chapter 3 (18)
Life Insurance Company Formation and Restructuring (18)
Corporate Structure of Life Insurers (18)
Incorporating in the United States (18)
Insurance Company Licensing (19)
Stock and Mutual Insurers (19)
Mergers and Acquisitions (20)
Holding Company Systems (20)
Demutualization (21)
Mutual Holding Company (22)
Chapter 4 (22)
The organizational Structure of Insurance Companies (22)
Functional Areas in a Life Insurance Company (22)
Effective Organizational Structure (22)
The Organizational Chart (23)
Pyramidal Organizational Structure (23)
Policyowners and Stockholders (24)
Board of Directors (24)
Company Management (25)
Variations Among Companies (25)
Centralized and Decentralized Organizations (26)
Line and Staff Units (26)
Types of Authority (26)
Ways of Organizing Work (26)
Strategic Business Unit Organization (27)
Committees (27)
Committees of the Board of Directors (27)
Interdepartmental Committees (28)
Chapter 5 (28)
Marketing Activities and Strategies (28)
Marketing (28)
Marketing Activities (28)
The Marketing Mix (29)
Market Identification (29)
Market Segmentation (29)
Target Marketing (30)
Types of Marketing Information (30)
Marketing Environment (31)
Internal Marketing Environment (31)
External Marketing Environment (31)
Marketing Plan (32)
International Expansion (32)
Chapter 6 (33)
Product Development (33)
The Product Development Process (33)
Personnel Involved with Product Development (33)
Product Planning (33)
Comprehensive Business Analysis (34)
Elements of a Comprehensive Business Analysis (34)
Staff Responsibilities During a Comprehensive Business Analysis (34)
Product Proposals (35)
Technical Design (35)
Product Implementation (36)
Policy Filing (36)
Promotion and Sales Materials (36)
Information Systems (37)
Education and Training (37)
Product Introduction (37)
Sales Monitoring (37)
Review of the Product Development Process (38)
Chapter 7 (38)
Pricing Insurance Products (38)
Pricing Strategies (38)
Actuarial Assumptions (38)
Investment Earnings and Interest Rates (39)
Cost of Benefits and the Mortality Factor (39)
Mortality Table Calculations (39)
Mortality Tables and Data (40)
Insurance Product Expenses (40)
Policy Lapses (41)
Safety Margins (41)
Bundled and Unbundled Pricing (41)
Bundled Pricing (41)
Policy Reserves and Cash Values (42)
Profit-Testing Actuarial Assumptions (42)
Managing Pricing Results (42)
Chapter 8 (43)
Product Distribution (43)
Personal Selling Distribution Systems (43)
The Sales Process (43)
Cold Calling and Needs Analysis (44)
Agency-Building Distribution Systems (44)
Career Agency System (44)
Marketing Territory (45)
Branch Office System (45)
General Agency System (45)
Multiple-Line Agency (MLA) System (45)
Home Service and Worksite Marketing Systems (46)
Location-Selling and Salaried Sales Systems (46)
Selling Group Products (46)
Nonagency-Building Distribution Systems (46)
Financial Institutions Systems (47)
The NASD (48)
Direct Response Systems (48)
Chapter 9 (49)
Home Office Support for Distribution Systems (49)
Support for Agency-Building Systems (49)
Recruiting and Contracting (50)
Typical Agency Contract Provisions (50)
Licensing and Training (50)
Compensation and Benefits (51)
Sales Support (51)
Technology Support (52)
Nonagency-Building Distribution Systems (52)
Support for Broker/Dealers (53)
Support for Banks (53)
Chapter 10 (54)
Life Insurance Underwriting (54)
Life Insurance Underwriting (54)
Insureds and Applicants (54)
Antiselection and Persistency (54)
Underwriting Philosophy and Guidelines (54)
Fundamentals of Individual Life Insurance Underwriting (55)
Risk Classes (55)
Risk Assessment Factors for Individual Underwriting (55)
The Underwriting Process (56)
Field Underwriting (56)
Agent's Statement (56)
Teleunderwriting (57)
The Application for Insurance (57)
Three Forms of Part II (57)
Sources of Medical Information (58)
Table of Underwriting Requirements (58)
Underwriting Decisions (58)
Policy Issue (59)
Reinsurance (59)
Retention Limits (59)
Chapter 11 (59)
Customer Service (59)
Insurance Company Customers (59)
Who Provides Customer Service? (60)
Effective Customer Service is: (60)
Customer Service Transactions (61)
Service Timeliness (62)
Service Quality (62)
Customer Relationship Management (63)
Chapter 12 (64)
Claim and Annuity Benefit Administration (64)
Life Insurance Claim Administration (64)
Verification of Policy Status and Coverage (64)
Verification of Loss (65)
Disappearance of the Insured (65)
Verification of Policy Coverage (65)
Suicide Exclusion (66)
Contestable Claims (66)
Misrepresentation and Rescission (66)
Additions to the Death Benefit (67)
Deductions from the Death Benefit (67)
Calculating the Benefit Amount (67)
Determining the Proper Recipient (67)
Determining How to Pay Proceeds (68)
Life Insurance Settlement Options (68)
Denying the Claim (68)
Annuity Death Benefit Administration (69)
Annuity Payout Administration (69)
Chapter 13 (70)
Information Management (70)
Information Management (70)
Elements of Information Systems (70)
Application Software for Insurers (70)
Databases (71)
Communications Technology (71)
Information System Security (71)
Transaction Processing Systems (72)
Decision Support Systems (72)
Operations Support Technologies (73)
Electronic Commerce (73)
Information Management for Specific Company Functions (73)
Chapter 14 (75)
An Overview of Financial Management (75)
Profitability (75)
Organization of Financial Management (75)
Basic Accounting Documents (75)
Maintaining Policy Reserves (75)
Other Required Reserves (76)
Basic Accounting Equation (76)
Revenues and Expenses (76)
Profits and Losses (76)
Linking the Balance Sheet and Income Statement (77)
Solvency (77)
Risks Affecting Solvency (77)
Examples of Risks (78)
Measuring Solvency (78)
Risk-Based Capital Ratio Requirements (78)
Measuring Profitability (79)
Managing Capital and Surplus (79)
Managing Cash Flows (79)
Asset/Liability Management (ALM) (79)
Cash-Flow Testing (80)
Chapter 15 (80)
Managing Investments (80)
Investment Operations (80)
Investment Policy (81)
Investment Department Activities (81)
Risk-Return Tradeoff and Diversification (81)
Regulation (81)
Debt Assets and Equity Assets (82)
New and Previously Issued Securities (82)
Bonds (82)
Types of Bonds (82)
Stock (83)
Mortgages (83)
Real Estate (83)
Policy Loans (84)
Bond Risk and Return Characteristics (84)
Investment Strategies (84)
Chapter 16 (85)
Accounting (85)
Accounting (85)
Internal Users (85)
External Users (85)
Accounting (86)
Accounting Standards (86)
GAAP (86)
Statutory Accounting in the United States (86)
Financial Accounting Operations (87)
Premium Accounting (87)
Investment Accounting (87)
General Accounting (88)
Tax Accounting (88)
Financial Reporting (88)
The Annual Statement (88)
The Annual Report (89)
Budgeting and Budget Forecasting (89)
Operational Budgets (89)
Cash Budgets and Capital Budgets (89)
Cost Accounting and Budget Variance (90)
Auditing (90)
External Audits (90)
Financial Condition Examination (91)
Chapter 17 (91)
Human Resource Management (91)
Human Resource Functions (91)
Human Resource Planning (91)
Employee Selection (92)
Pre-Employment Testing (92)
Employee Training (93)
Performance Evaluation (93)
Compensation (94)
Employee Retention (94)
Types of Employee Separation (95)
Chapter 18 (95)
Legal and Compliance Operations (95)
Compliance (95)
Compliance and Legal (95)
Incorporation and Structural Changes (95)
Product Development and Contracts (96)
Product Distribution (96)
Claim Administration (96)
Employee Relations (96)
U.S. Employment Discrimination Laws (97)
Employment Standards Laws (97)
Litigation (97)
Regulatory Compliance (98)
Audits (98)
Sarbanes-Oxley Act (98)
Typical Activities of the Compliance Function (99)
Requirements for Complaint Records (99)
Market Conduct Examinations (99)
Chapter 1
Life Insurance Company Operations
Financial Institutions
financial services industry: financial institutions that offer products and services to help people, businesses, and governments meet their financial goals
financial institution: a business that owns primarily financial assets, such as stocks and bonds, rather than fixed assets, such as equipment and raw materials
Depository institutions
Pension funds
Mutual fund companies
Securities broker/dealers
Investment banks
Finance companies
Insurance companies
depository institution: specializes in accepting deposits and making loans; depository institutions in the United States include (1) commercial banks, (2) savings and loan associations, (3) savings banks, and (4) credit unions
pension fund: a financial asset pool that provides retirement funds for people covered by pension plans; not a corporate entity like most other financial institutions
mutual fund company: an investment company that operates a number of mutual funds
mutual fund: an investment vehicle that pools the funds of investors and uses these funds to buy stocks, bonds, and other financial instruments
Investors in a mutual fund own shares in the fund. The value of a share varies as the value of the investments owned by the fund varies.
securities broker/dealer:specializes in buying and selling stocks, bonds, and other financial investments
Investment banks primarily assist corporations and governments with the initial sale of securities to the public
finance company:specializes in making short- and medium- term loans to consumers and businesses; three types: (1) commercial, (2) consumer, and (3) sales finance companies insurance company:
receives premium payments from customers in exchange for providing insurance policies that protect against financial loss caused by insured events
life insurance company:underwrites and sells life insurance, which provides protection against the economic loss caused by the death of the person whose life is insured
Life insurance products can be classified as:
term life insurance: provides coverage during the period specified in the policy; the death benefit is payable only if the insured dies during that period
endowment insurance: provides a policy benefit payable either when the insured dies or on
a stated date if the insured is still alive on that date
cash value life insurance:provides coverage throughout the insured’s lifetime, on the condition premiums are paid as stated in the policy, and includes a savings element, called the cash value
variable life insurance:cash value life insurance in which the policy’s face amount and other values may vary, reflecting the performance of the investment subaccounts selected by the policyowner
annuity: a legally enforceable written agreement between an insurance company and a policyowner, under which the insurer promises to make a series of periodic payments to a named person in exchange for a premium or a series of premiums
immediate annuity: payments begin one month or one year after purchase
deferred annuity: payments generally begin many years after purchase
fixed annuity: insurer pays a fixed interest rate for a specified period
variable annuity: values fluctuate according to investment funds
life annuity: payments continue for at least the lifetime of the annuitant
annuity certain: payments continue for a stated period
Roles of Life Insurance Companies
Life insurance companies provide financial security to consumers and serve as financial intermediaries
risk: in the context of insurance, the possibility of a financial loss
Life insurance protects against the risk of dying. Annuities protect against the risk of “living too long.”
financial intermediary: an organization that channels funds from those people, businesses, and governments who have a surplus of funds (savers) to those who have a shortage of funds (borrowers)
Life insurance companies take a portion of the money that their customers pay in the form of insurance and annuity premiums and invest that money in business and industry. These investments provide funds that businesses need to operate and expand.
Life Insurance Company Operations
A company’s operations are the actions or processes that the company performs to conduct its business.
All life insurers carry out each operation in some way, although not necessarily in the same way. Insurers’products, cultures, modes of organization, and management styles are reflected in the specific ways in which insurers operate.
Life insurance company operations are conducted by people working in a variety of functional areas
Typical Functional Areas in Life Insurance Companies
Marketing
Actuarial
Underwriting
Customer service
Claim administration
Information technology
Investments
Accounting
Human resources
Legal
Compliance
Annuity benefit administration
Risk Management
Risk management is an important part of insurance company operations. Insurers take steps to manage each type of risk
risk management: the practice of systematically identifying risk, assessing risk, and dealing with
risk
General business risks, which apply to all companies:
market risk:changes in market interest rates, securities prices, or foreign currency exchange rates will result infinancial losses for the company
strategic risk: the company will not implement appropriate business plans and strategies needed to adapt to changes in its business environment
legal risk: new laws, regulations, or court opinions will have a negative impact on the company’s operations and overall performance
liquidity risk: the company will be unable to obtain necessary business funds to meet its financial obligations on time without incurring unacceptable losses
credit risk: a debtor of the company will fail to fully meet a financial obligation
operational risk:the company will experience financial loss as a result of (1) deficiencies in company systems, business processes, personnel, or internal controls; or
(2) external events that disrupt or have some other negative effect on its business
operations
Two important risks are specific to life insurers:
premium rate risk: the insurer will set the premium rates on a product either too low to
g enerate enough revenue to cover the product’s claims and other expenses or too high to
c ompete with similar products
underwriting risk: the insurer will approve inappropriate amounts of life insurance coverage for proposed insureds, approve unacceptable applications, or decline acceptable applications
Strategic Planning
The cornerstone of successful operations is effective planning: the process of preparing for the future by establishing appropriate goals and formulating the strategies, tactics, and other activities necessary to achieve those goals
strategic planning:the process of determining an organization’s major long-term corporate objectives and the broad, overall courses of action that the company will follow to achieve these objectives
Usually, an insurer’s senior management is responsible for strategic planning.
A strategic plan covers a fairly long time horizon, such as three or five years. The plan should be flexible enough to respond to changes in the economic environment, regulations, customer expectations, competition, and technology
Sell a line of business
Acquire another company
Change the corporate form of the company
Expand the current product line
Create a new product line
Sell products in a new region
Use a different distribution channel to sell products
Revise underwriting philosophy and guidelines
strategic alliance:a relationship involving the sharing or risk and rewards by two or more
independent firms that are also pursuing their own strategic goals. Insurers form strategic alliances with
Third-party administrators
Securities firms
Foreign insurers
Domestic insurers
Commercial banks
Technology firms
Internet marketers
Medical firms
Life insurers often enter strategic alliances to:
Gain access to new markets
Gain new distribution channels
Improve the profitability of existing operations
Improve customer service
Enhance a product line
Strategic Alliances and Outsourcing
Two Types of Strategic Alliances
partnership: a contract between two or more parties that agree to pool their funds and talents and share in the profit and loss of the enterprise; generally a continuing relationship that can be the basis of many projects
Example:two insurance companies work together to develop, underwrite, distribute, and administer an insurance product
joint venture:a contractual agreement of two or more otherwise independent parties to work together on a specific project for a specified time period; usually limited to one project with a specified duration—once the project is completed, the joint venture terminates
Example: an agreement between an insurer and a bank in which the insurer develops, issues, and administers an annuity product and supplies the product to the bank for distribution outsourcing: the practice of hiring an external vendor to perform specified operations. Functional operations commonly outsourced by life insurers:
Distribution
Information management
Legal/compliance
Financial management
Human resources
Life insurance claim administration
Customer service
Life insurance underwriting
Before deciding whether to outsource a particular operation, an insurer evaluates the expected benefits and drawbacks associated with outsourcing that operation:
The insurer’s own ability to perform the operation efficiently, effectively, and cost-effectively
The importance of immediate implementation of a new operation
The availability of start-up capital
The importance of control over the operation
Chapter 2
Competition, Regulation, and Ethics in the Lift Insurance Industry
The U.S. Regulatory System
In the United States, the McCarran Ferguson Act gives state governments the primary authority to regulate the insurance industry
In addition, the Gramm-Leach-Bliley Act provides for the functional regulation of financial institutions
Functional Regulation
The principle that similar financial activities should be regulated by a single regulator, regardless of which type of financial institution engages in the activity
State Regulation
In the United States, each state has its own set of laws to regulate life insurance companies, products, and distributors
State Insurance Department
Operates under the direction of an insurance commissioner or state superintendent of insurance
Ensures that insurance companies and distributors operating within the state comply with all of the state's insurance laws and regulations
The NAIC
The National Association of Insurance Commissioners (NAIC)is a nongovernmental organization composed of the insurance commissioners from the individual states, the District of Columbia, and the four U.S. territories The NAIC develops model laws and model regulations: Model Law
A sample statute that states are encouraged to enact
Model Regulation
A sample regulation that state insurance departments are encouraged to adopt
U.S. Federal Regulation
Insurance companies are subject to certain federal laws. For example, Federal laws that regulate the sale of securities also apply to the sale of variable life insurance and variable annuities
A security is a document or certificate representing either an ownership interest in a business—for example, a share of stock —or an obligation of indebtedness owed by a business, a government, or an agency—a bond, for example
The federal Securities and Exchange Commission (SEC)—which administers federal securities laws—has determined that variable products are securities as well as insurance products. Thus, variable insurance products are subject to federal securities regulation as well as to insurance regulation
Federal Regulation Affecting Insurance
The following types of federal regulation also affect insurance operations:
Income tax laws - Affect the design of insurance products
Consumer protection laws - Apply to insurers that engage in certain interstate activities, primarily interstate advertising
Privacy laws- Affect how insurers collect and use personal information about their consumers
Employee benefit laws- Affect how insurers design group insurance products and establish employee benefit plans
Anti-terrorism laws - Require insurers to implement certain measures designed to detect and prevent illegal activities used to finance terrorism
Reforms in the U.S. Regulatory System
Gramm-Leach-Bliley (GLB) Act
A U.S. federal law that advances integration among financial services providers by
permitting banks, insurers, and broker/dealers to affiliate in a holding company structure Holding Company: A company that has a controlling interest in one or more other companies Generally, controlling interest of a company is ownership of enough voting shares of stock to control company policy
Subsidiary: A company owned and controlled by a holding company
Insurance Product Sales Competition
In companies sell insurance products with much success.
In the United some countries, securities firms and mutual fund States, securities firms and mutual fund companies cannot create their own insurance products.
In the United States, securities firms and mutual fund companies may own a life
insurance company, or they may enter into a distribution arrangement with one or more insurers
Canadian Regulatory System
In Canada, insurers may be federally incorporated or provincially incorporated. The federal government and the provincial governments jointly mange life insurance regulation.
The Canadian regulatory system also includes an element of self regulation: the Canadian Life and Health Insurance Association
Federal Regulation
The federal Office of the Superintendent of Financial Institutions (OSFI)regulates the solvency of federally incorporated companies, foreign insurers—that is, insurers incorporated in other countries—and specified provincially incorporated insurers. Provincial Regulation
Insurers incorporated under the insurance laws of a particular province are subject to solvency regulation and examination by the insurance department in that province, rather than by the federal government.
Other Canadian Regulation
Self Regulation
The Canadian Life and Health Insurance Association (CLHIA) is an industry association composed of life and health insurers. Almost all Canadian life insurers belong to this association.
The CLHIA, OSFI, and other regulatory bodies jointly developed the Standards of Sound Business and Financial Practices,which set forth minimum guidelines for federally regulated insurers in several categories including capital management, credit risk management, securities portfolio management, product design and pricing, underwriting, and control
The Canadian Council of Insurance Regulators (CCIR)
The CCIR is a nongovernmental committee of provincial insurance regulators that looks at emerging industry and business trends and works toward harmonizing legislation through model codes and standardized reporting requirements
Solvency
Solvency is the ability of an insurer to pay its debts, policy benefits, and operating expenses on time
Solvency laws ensure that insurers are financially able to meet their debts and pay policy benefits
when they come due
Solvency laws regulate
Capitalization
Product design
Policy reserves
Asset, Reserve, and Capital Requirements
Basic Accounting Equation
Assets = Liabilities + Capital and Surplus
Assets are all things of value owned by a company.
The most important asset category is investments.
Regulators impose requirements on
1. The minimum amount of assets insurers must hold
2. The types of investments insurers can make to ensure that those investments are
conservative and prudent
3. How insurers must value their assets
Liabilities are a company’s debts and future obligations.
The largest category of liabilities is policy reserves.
A policy reserve is a liability identifying the amount that, together with future premiums
and an assumed rate of investment interest, is expected to be needed to pay benefits of in-force policies as they come due.
Policy reserves represent a company’s contractual obligations to its customers.
Capital represents the amount of money invested in the company by its owners. Surplus represents the total net profits that have been earned from a company’s operations and left to accumulate since the company’s inception. Capital and surplus refers to the amount by which a life insurer’s assets exceed its liabilities
The regulatory requirements imposed on assets, policy reserves, and capital and surplus protect insurer solvency in the following basic ways:
Asset requirements ensure that insurers invest sufficiently and wisely.
Reserve requirements ensure that companies set aside enough money to pay policy benefits.
Minimum capital and surplus requirements help guarantee that the amount of money each insurer has available comfortably exceeds the amounts owed to customers.
Financial Statement Reviews and Financial Condition Examinations
In most countries, regulators monitor the financial condition of life insurance companies by reviewing—annually or more frequently—the companies' accounting reports.
In the United States, each state insurance department reviews the Annual Statements of insurers conducting business in the state.
An Annual Statement is a document that reports information about an insurer's operations and financial performance, including its assets, liabilities, and capital and
surplus
Financial Condition Examinations
Regulators monitor insurer solvency by conducting periodic on-site examinations of insurance companies to check the companies’ business records. In the United States, state regulators conduct financial condition examinations of life insurers every three to five years.
Market Conduct Regulation
Market conduct is all of the actions taken in the performance of an organization's business operations.
Market conduct laws ensure that insurers conduct their businesses fairly and ethically.
Market conduct laws regulate
Company management
Marketing and advertising
Underwriting and policyowner service
Complaint handling and claim administration
Licensing and Policy Forms
An insurance producer is a person licensed to sell insurance.
Typically, every individual who plans to sell life insurance products in a particular jurisdiction must first be licensed by that jurisdiction
A policy form is a standardized contract form that shows the terms, conditions, benefits,
and ownership rights of a particular insurance product.
In the United States, state laws and regulations specify the types of provisions that must and must not be included in a policy form
Promotion
Regulation of life insurers' promotion activities addresses the content of advertising and sales aids and identifies the disclosure information that insurers must provide to customers.
The NAIC Life Insurance Disclosure Model Regulation specifies that life insurers must give prospective buyers of life insurance, other than credit or variable life, a Buyer's Guide.
Buyer's Guide - A publication that explains to consumers how to determine how much life insurance coverage they need, describes the various types of life insurance policies, and educates consumers about how to compare the costs of similar types of policies.
The federal SEC requires insurers to provide prospective customers of variable life insurance and variable annuities with a prospectus, which is a written document describing specific aspects of the security being offered for sale, and specifies the
information that must be included in the prospectus
Sales Practices
Laws in most jurisdictions prohibit insurers and producers from engaging in unfair sales practices, which generally involve some type of misrepresentation.
A suitability requirement is a regulation that imposes a duty on insurers and producers
to have reasonable grounds for recommending a specific product as suitable for a customer's needs
Consumer Privacy
Insurers collect a large amount of personal information about consumers.
Privacy laws address concerns about possible inaccuracies in the information and about how information is collected and used.
Nonpublic personal information is information about a consumer that an insurer or other financial services company collects in connection with providing a financial services product or service to the consumer
The Model Privacy Act
In the United States, the NAIC Insurance Information and Privacy Protection Model Act, commonly known as the NAIC Model Privacy Act, establishes standards for the collection, use, and disclosure of information gathered in connection with insurance transactions, such as underwriting and claim evaluation.
State laws based on the Model Privacy Act apply only to personal insurance, not to insurance purchased for business or professional needs.
The Gramm-Leach-Bliley (GLB) Act
The U.S. federal GLB Act requires financial institutions, including insurers, to establish written procedures for protecting consumers' nonpublic personal information and
to disclose these privacy policies to their customers every year.
Under the GLB Act, customers have the right, by written request, to block the sharing of confidential data with third parties outside of a holding company structure.
Customers cannot block a financial institution from sharing their personal data with companies with which the institution is affiliated under a holding company structure
Complaint Management
Many jurisdictions regulate how insurers respond to consumer complaints. From a regulatory standpoint, a complaint is a written communication to the insurer or to an insurance regulatory body in which a consumer expresses a grievance against an insurer
Ethics
Ethics is a system of accepted standards of conduct and moral judgment that combines the elements of honesty, integrity, and fair treatment.
Because they hold a position of public trust, life insurers and the people who work for them have a responsibility to act ethically and to make correct ethical decisions
A starting point for maintaining a high level of corporate ethics is for life insurers to
formulate ethical codes that set guidelines for appropriate values and standards of ethical business behavior.
Another way to make ethics an integral part of insurance company operations is to establish a corporate ethics office, which is a department or unit in which employees can
(1) receive advice or counsel to help resolve ethical dilemmas and (2) report ethical
misconduct
Chapter 3
Life Insurance Company Formation and Restructuring Corporate Structure of Life Insurers
Most laws require a life insurer to organize and operate as a corporation: a legal entity, separate from its owners, created by governmental authority, that continues beyond the death of its owners. Two characteristics protect corporate stability and permanence:
Limited liability.A corporation’s owners are not personally liable for the debts of the corporation.
Continued existence. A corporation conducts its business beyond the death of its owners.
Incorporating in the United States
An insurer incorporates in the state of its choosing. Typically, a corporation’s organizers file articles of incorporation—a document that describes the proposed company’s essential features —with the appropriate state official.
State insurance officials evaluate the financial soundness, business plan, and financial projections of the proposed insurer, as well as the qualifications of those who will operate the insurer.
Upon approval, regulators issue a certificate of incorporation: a document granting a corporation its legal existence and its right to operate under the terms specified in the articles of incorporation. domiciliary state: the state in which the insurer incorporates, has its principal legal residence, and where the insurer’s home office is usually located.
home office: an insurer’s headquarters and usually the location of its executive offices.
From a state’s point of view:
domestic insurer: regulated by that state
foreign insurer: regulated by another state
alien insurer: regulated by another country
From a country’s point of view, a domestic insurer is regulated under that country’s laws and a foreign insurer is regulated under another country’s laws.
Canadian life insurers incorporate under federal law or provincial law.
federal incorporation: proposed insurer files an application for letters patent, which certifies that the government has given the insurer the right to incorporate, with the Office of the Superintendent of Financial Institutions (OSFI)
provincial incorporation:proposed insurer applies for letters patent or, in some provinces, a memorandum of association, a similar document
Insurance Company Licensing
The insurer typically must obtain a license from each jurisdiction in which it plans to do business. license: a document granting legal authority for the insurer to conduct an insurance business in a specified jurisdiction
Insurers licensed to offer life insurance generally are also authorized to offer fixed annuities. Most states require that insurers obtain specific authority to offer variable insurance products.
U.S. insurers must have capital funds at least equal to a minimum specified dollar amount, which varies from state to state. Insurers usually have capital funds in excess of minimum initial requirements.
The insurer also deposits a specified minimum amount of securities in trust with the state of incorporation.
Stock and Mutual Insurers
stock insurance company: owned by the people who purchase shares of the company’s stock mutual insurance company: owned by the policyowners of the company
stock: a security that represents an ownership interest in a company
stockholders: own the stock company
stockholder dividends: periodic distributions of a company’s net profit that may be received by stockholders
Common Stockholders
Usually have one vote per share owned
May receive stockholder dividends
Do not receive a guaranteed dividend amount
Preferred Stockholders
Usually do not have voting privileges
Receive dividends before any dividends can be paid to common stockholders
Receive a guaranteed dividend amount
Mutual policyowners have two specific rights:
membership rights: ownership rights, including the right to vote in company elections on the basis of one vote for each policyowner
policy rights: contractual rights; stock company policyowners also have these rights
Stock insurers outnumber, and are easier to establish than, mutual insurers. Mutual insurers are typically older and larger than stock insurers and are a strong industry presence.
Mergers and Acquisitions
Insurers sometimes decide that the best way to meet their strategic objectives is through a merger or acquisition.
merger: assets and liabilities of two or more companies are combined; only one company survives
Stock and mutual insurers participate in mergers. If a mutual insurer is involved in a merger, the resulting company must be a mutual company.
acquisition: one company gains controlling interest in another company
Original management team may continue to operate the acquired company or acquiring company management may take over operations.
A mutual company may purchase a stock company. A mutual company cannot be purchased through the purchase of stock (mutuals have no stock).
A merger or acquisition should result in higher value than the combined values of the former companies. To be more valuable, combined operations should be more efficient and more profitable.
due diligence—a careful investigation into (1) the potential transaction’s details and (2) the other company’s operation and management Benefits of Mergers and Acquisitions
Increase size quickly and significantly
Overcome financial difficulties or obtain enough surplus
Expand or extend products, services, customer base, distribution methods, or sales territory
Achieve economies of scale: a reduction in unit costs as the size of operations increases Disadvantages of Mergers and Acquisitions
Complicated, expensive process
Employee concerns about corporate culture, management style, and job status in new company
Cost and time involved in combining sales, distribution, and information systems
Costs associated with relocation of company headquarters and employees
Business in force may decline if policyowners and producers are dissatisfied with new company
Holding Company Systems
Using a holding company system to consolidate two or more insurers enables an insurer to: