FLMI cheat sheet

Risk pooling: independent, homogeneous exposure units are combined so that actual losses converge toward expected losses as the number of units increases (law of large numbers).

Insurable risk tests: loss must be accidental and definite, measurable, occur in a large number of similar units, not be catastrophic to the insurer, and carry an economically feasible premium.

Insurable interest is required at policy inception for life insurance and at the time of loss for property coverage.

Principle of indemnity: property and health benefits cannot exceed the actual loss; life insurance is a valued contract paying the stated face amount.

Utmost good faith: the applicant must disclose material facts and the insurer relies on representations and warranties, limited by the incontestability clause.

Adverse selection is controlled by underwriting, waiting periods, exclusions, and experience rating; moral hazard by deductibles, coinsurance, and exclusions.

Reinsurance: treaty reinsurance is automatic for a class of business, facultative is case by case; the ceding company pays premium and retains a stated amount.

Insurer types: stock (shareholder-owned), mutual (policyholder-owned), fraternal benefit societies, and Lloyd's-style syndicates, plus captives and reinsurers.

Distribution channels: career agents, independent agents and brokers, direct response, worksite marketing, bancassurance, and internet sales.

Term life: temporary death benefit with no cash value; level, decreasing, or increasing benefit; renewal and conversion privileges are priced separately.

Whole life: level premium for life with guaranteed death benefit and cash value; nonforfeiture options are cash surrender, reduced paid-up, and extended term.

Universal life: flexible premium, cash value credited interest, monthly cost-of-insurance and expense charges; death benefit Option A (level) or Option B (increasing).

Variable life: cash value in separate-account subaccounts, investment risk on the owner, securities license and prospectus required, guaranteed minimum death benefit.

Fixed annuity: insurer bears investment risk and guarantees a minimum interest rate; variable annuity risk is on the owner and units are valued in separate accounts.

Exclusion ratio = investment in the contract ÷ expected total annuity payout; that portion of each payment is excluded from income until basis is recovered.

MEC: fails the 7-pay test; loans and withdrawals are taxed income first with a 10% penalty before age 59½; 1035 exchanges move basis tax-free between life and annuity contracts.

Health cost sharing: deductible, coinsurance (percentage), copayment (fixed amount), out-of-pocket maximum; HMO, PPO, and POS plans differ in network and referral rules.

Disability income: benefit depends on own-occupation or any-occupation definition, elimination period, benefit period, and residual or partial disability provisions.

Underwriting sources: application, agent's report, medical exam or paramedical, Medical Information Bureau, attending physician statement, prescription data, inspection report.

Risk classes: preferred, standard, substandard (rated or table rated), and declined; substandard risks may be issued with extra premium, exclusion, or a lien.

Policy effective date: coverage begins when the policy is delivered and the first premium is paid, unless a conditional receipt provides earlier coverage.

Free-look: the owner may return a newly delivered policy within the state-specified period (often 10 to 30 days) for a full refund.

Contestability and suicide clauses usually run two years; afterward the insurer generally cannot rescind for misrepresentation and pays the death benefit.

Grace period: premium may be paid after the due date (commonly 30 or 31 days) with coverage continuing; lapse occurs when the grace period expires.

Reinstatement requires evidence of insurability and payment of overdue premiums with interest; a new contestable period may apply.

Reserves: net premium reserve = present value of future benefits minus present value of future net premiums; separate accounts back variable products.

Administration tasks: premium modes, automatic premium loan, policy loans and surrenders, beneficiary designations, and settlement options.

McCarran-Ferguson Act (1945): the states regulate insurance, and federal antitrust law applies only to the extent states do not regulate.

NAIC drafts model laws and regulations and coordinates state accreditation; enforcement authority rests with the state insurance departments.

Commissioner powers: licensing, form and rate filing review, financial examination, market conduct examination, cease-and-desist orders, and penalties.

Producer requirements: state license, insurer appointment, continuing education, and fiduciary handling of premiums; rebating and twisting are prohibited.

Solvency tools: risk-based capital ratio, IRIS financial ratios, statutory reserves and valuation standards, and state guaranty association coverage.

Replacement: notice, disclosure, and comparison must be given to the replacing insurer; the existing insurer may be notified and a free-look period applies.

Federal tax: death benefits generally income tax free, cash value grows tax-deferred, MEC distributions are taxed income first with a 10% penalty before 59½, premiums generally not deductible.

Statutory accounting (SAP) is conservative and solvency-focused using admitted assets and required reserves; GAAP matches revenue with expense for general financial reporting.

Privacy and anti-money-laundering: GLBA limits sharing of nonpublic personal information, and insurers must maintain AML programs and report suspicious activity.