Insurance Review Table of Contents CHAPTER ONE Development of Insurance ..................................................................................... 1 Risk Coverage in History .................................................................................................................. 1 Development of Life Insurance ........................................................................................................ 2 Structure of the Insurance Industry .................................................................................................. 8 Organization of Fraternals .............................................................................................................. 12 Overall Picture ................................................................................................................................ 16 CHAPTER TWO Basic Life and Health Insurance .......................................................................... 20 The Human Life Value Concept ..................................................................................................... 20 Life Expectancy for Applicants at Different Ages ........................................................................... 26 Abridged Life Table ........................................................................................................................ 27 The Role of Health Insurance ........................................................................................................ 34 Business Insurance Systems ......................................................................................................... 36 CHAPTER THREE Group Insurance .................................................................................................. 43 Designing Group Insurance Coverage ........................................................................................... 43 Group Life Insurance ...................................................................................................................... 55 Group Health Insurance ................................................................................................................. 62 Underwriting Principles and Controls ............................................................................................. 67 Group Selection .............................................................................................................................. 74 How Plans Are Financed ................................................................................................................ 79 CHAPTER FOUR Disability ............................................................................................................... 86 Social Consequences of Disability ................................................................................................. 86 Dealing with Risk ............................................................................................................................ 86 Government Disability Benefits ...................................................................................................... 88 Structure of Disability Policies ........................................................................................................ 88 Business Policies ........................................................................................................................... 94 CHAPTER FIVE Annuities ............................................................................................................... 98 How Annuities Work ....................................................................................................................... 98 Development of Annuities .............................................................................................................. 99 Annuity Benefits ........................................................................................................................... 103 Determining Cost .......................................................................................................................... 104 Unit Values ................................................................................................................................... 106 CHAPTER SIX Fire, Property and Casualty Insurance .............................................................. 114 Fire Insurance .............................................................................................................................. 115 Property and Casualty Insurance ................................................................................................. 116 Surety and Fidelity Bonds ............................................................................................................ 119 Liability 120 Terrorism Insurance ..................................................................................................................... 120 Workers Compensation ................................................................................................................ 121 i CHAPTER SEVEN Government and Insurance ............................................................................... 123 Social Security ............................................................................................................................. 124 Health Insurance .......................................................................................................................... 125 Medigap Insurance Products ....................................................................................................... 133 Government Regulation & Insurance ........................................................................................... 138 NAIC Regulation .......................................................................................................................... 139 Federal Regulations ..................................................................................................................... 141 Chapter 8 Ethics and the Professional ............................................................................................ 143 Ethics and the Law ....................................................................................................................... 143 Ethics Commissions ..................................................................................................................... 146 Agent Compliance ........................................................................................................................ 147 Documenting Clients' Files .......................................................................................................... 150 Litmus Test .................................................................................................................................. 155 ii CHAPTER ONE Development of Insurance Insurance is an idea as old as civilization, and as new as each fall's hurricane season. The basic idea of insurance is simple, but the way it has developed into the huge industry it is today and its function in the economy are not widely understood. Neither is its unique accounting system. In order to grasp some of the complications of modern insurance, a brief overview can be helpful to anyone concerned with the industry, whether as a consumer, a supplier, or a professional accountant. Public Interest Involved Insurance has been held by the U.S. Supreme Court to be "affected with a public interest" and thus subject to government regulation. States have the chief responsibility for regulating the insurance industry. Because of state statutory requirements, insurance accounting differs somewhat from the generally accepted accounting principles used by the business community. State approved reporting forms emphasize valuation of assets and liabilities for insurance companies on a liquidation basis rather than a going concern basis. Solvency is the primary consideration. The importance of fulfilling social goals in addition to business objectives, set out in the Supreme Court decision, is emphasized under this and other regulations that recognize the historically important role of insurance in economic development. Risk Coverage in History Greeks and Romans had insurance contracts, but the business of risk coverage is believed to be even older than that. In Babylon as early as 4000 to 3000 B.C. there was a fairly sophisticated banking system. Merchants took out loans to ship goods by caravan or from port cities. The early custom when such a cargo came to grief was to foreclose by selling the merchant and his family into slavery. A more humane and profitable system gradually evolved. Lenders found they could charge premium interest rates on the loans and, by making enough of them, cover losses and produce a profit. Such an agreement came to be called a "bottomry" contract. It was known in ancient Greece and among sea-going traders in other nations around it. Roman law recognized bottomry contracts in which agreements were drawn up and funds were deposited with money changers. Marine Insurance During the Middle Ages, marine insurance as a separate arrangement from premium interest on loans was developed in Venice and other Italian port cities. The ban on usury by the Catholic Church is believed to have influenced the separation. The oldest known written insurance policy, from Genoa, has a date of 1347. The word "policy" can be traced to the Italian