General Insurance Concepts and Risk Management
Licensing and Marketing Compliance for Producers
Getting and keeping a license
A person must hold a state producer license before soliciting, negotiating, or selling insurance, and generally must be appointed by the insurer before acting on its behalf. Nonresident licenses are issued through reciprocity when the home-state license is in good standing. Licenses must be renewed, continuing education completed, and address changes and criminal convictions reported. A license may be surrendered, suspended, or revoked for violations, and commissions may be paid only to licensed persons.
Marketing rules that generate questions
Misrepresentation is false or misleading statements about policy terms or an insurer's financial condition. Twisting is inducing a policyholder to lapse or surrender through misrepresentation. Churning is replacement done mainly to generate new commissions. False advertising and incomplete illustrations violate advertising rules; illustrations must be labeled and clearly separate guaranteed from non-guaranteed elements. Replacement of existing life insurance or annuities requires a signed replacement notice and comparison, and often delivery of the new policy plus a free-look right. Annuity sales trigger suitability requirements (know the consumer's financial situation, needs, and objectives, and document it).
Handling money and data
Premiums are held in a fiduciary capacity and must be remitted promptly; commingling with personal funds is prohibited. Producers must also respect privacy rules, anti-money-laundering and OFAC screening obligations, do-not-call and anti-spam rules, and state fraud reporting requirements.
Trap and rule of thumb
A favorite trap: sharing commissions with an unlicensed assistant or friend (prohibited) versus splitting with a licensed colleague (allowed, usually with insurer knowledge). Rule of thumb: no license, no commission, and no signature on an application.
General Insurance Concepts and Risk Management
Risk, peril, and hazard
Risk is uncertainty about loss; peril is the cause of loss (fire, death, disability); hazard increases the chance or severity of loss. Physical hazards are tangible conditions. Moral hazard is dishonesty (faking a claim, arson for profit). Morale hazard is carelessness or indifference because insurance exists. Questions deliberately swap these two - memorize that moral = dishonest, morale = indifferent.
Pure versus speculative risk
Only pure risk (loss or no loss, no chance of gain) is insurable. Speculative risk (business ventures, gambling) involves the chance of gain and is not insurable. Exposure is the unit at risk.
Handling risk
Risk can be avoided, retained (self-insurance), reduced (loss control), shared (deductibles, copays, pooling), or transferred (insurance). Insurance is a transfer mechanism that pools many exposures so the losses of the few are paid by the premiums of the many. This works through the law of large numbers and is threatened by adverse selection, which is why underwriting and exclusions exist.
Insurable risk characteristics
Losses should be due to chance, definite and measurable, statistically predictable, not catastrophic to the insurer, spread over many similar units, and produce an affordable premium. Reinsurance further spreads large exposures.
Indemnity and insurable interest
Health and property insurance are contracts of indemnity - they restore, never profit. Life insurance is a valued contract: the face amount is paid regardless of financial loss. Insurable interest in life insurance must exist at the time of application (not at death). Subrogation applies to property and casualty, not life insurance.
Rule of thumb
If the insured could profit from the loss, it is speculative risk and uninsurable.