For other uses, see Insurance
(disambiguation) .
An advertising poster for a Dutch insurance
company from c. 1900–1918 depicts an
armoured knight.
Insurance is a means of protection from
financial loss. It is a form of risk management ,
primarily used to hedge against the risk of a
contingent or uncertain loss
An entity which provides insurance is known as
an insurer, insurance company, insurance carrier
or underwriter . A person or entity who buys
insurance is known as an insured or as a
policyholder. The insurance transaction involves
the insured assuming a guaranteed and known
relatively small loss in the form of payment to
the insurer in exchange for the insurer's promise
to compensate the insured in the event of a
covered loss. The loss may or may not be
financial, but it must be reducible to financial
terms, and usually involves something in which
the insured has an insurable interest established
by ownership, possession, or pre-existing
relationship.
The insured receives a contract , called the
insurance policy, which details the conditions
and circumstances under which the insurer will
compensate the insured. The amount of money
charged by the insurer to the Policyholder for the
coverage set forth in the insurance policy is
called the premium . If the insured experiences a
loss which is potentially covered by the
insurance policy, the insured submits a claim to
the insurer for processing by a claims adjuster .
The insurer may hedge its own risk by taking out
reinsurance , whereby another insurance company
agrees to carry some of the risk, especially if the
primary insurer deems the risk too large for it to
carry.
History
Main article: History of insurance
Early methods
Merchants have sought methods to
minimize risks since early times.
Pictured, Governors of the Wine
Merchant's Guild by Ferdinand Bol , c.
1680.
Methods for transferring or distributing risk were
practiced by Chinese and Babylonian traders as
long ago as the 3rd and 2nd millennia BC,
respectively. [1] Chinese merchants travelling
treacherous river rapids would redistribute their
wares across many vessels to limit the loss due
to any single vessel's capsizing. The
Babylonians developed a system which was
recorded in the famous Code of Hammurabi , c.
1750 BC, and practiced by early Mediterranean
sailing merchants. If a merchant received a loan
to fund his shipment, he would pay the lender an
additional sum in exchange for the lender's
guarantee to cancel the loan should the
shipment be stolen, or lost at sea.
Circa 800 BC, the inhabitants of Rhodes created
the 'general average '. This allowed groups of
merchants to pay to insure their goods being
shipped together. The collected premiums would
be used to reimburse any merchant whose
goods were jettisoned during transport, whether
due to storm or sinkage. [2]
Separate insurance contracts (i.e., insurance
policies not bundled with loans or other kinds of
contracts) were invented in Genoa in the 14th
century, as were insurance pools backed by
pledges of landed estates. The first known
insurance contract dates from Genoa in 1347,
and in the next century maritime insurance
developed widely and premiums were intuitively
varied with risks. [3] These new insurance
contracts allowed insurance to be separated
from investment, a separation of roles that first
proved useful in marine insurance .
Modern insurance
Insurance became far more sophisticated in
Enlightenment era Europe, and specialized
varieties developed.
Lloyd's Coffee House was the
first organized market for marine
insurance.
Property insurance as we know it today can be
traced to the Great Fire of London , which in
1666 devoured more than 13,000 houses. The
devastating effects of the fire converted the
development of insurance "from a matter of
convenience into one of urgency, a change of
opinion reflected in Sir Christopher Wren 's
inclusion of a site for 'the Insurance Office' in his
new plan for London in 1667." [4] A number of
attempted fire insurance schemes came to
nothing, but in 1681, economist Nicholas Barbon
and eleven associates established the first fire
insurance company, the "Insurance Office for
Houses," at the back of the Royal Exchange to
insure brick and frame homes. Initially, 5,000
homes were insured by his Insurance Office. [5]
At the same time, the first insurance schemes
for the underwriting of business ventures became
available. By the end of the seventeenth century,
London's growing importance as a center for
trade was increasing demand for marine
insurance . In the late 1680s, Edward Lloyd
opened a coffee house, which became the
meeting place for parties in the shipping industry
wishing to insure cargoes and ships, and those
willing to underwrite such ventures. These
informal beginnings led to the establishment of
the insurance market Lloyd's of London and
several related shipping and insurance
businesses. [6]
Leaflet promoting the National
Insurance Act 1911 .
The first life insurance policies were taken out in
the early 18th century. The first company to offer
life insurance was the Amicable Society for a
Perpetual Assurance Office , founded in London in
1706 by William Talbot and Sir Thomas Allen . [7]
[8] Edward Rowe Mores established the Society
for Equitable Assurances on Lives and
Survivorship in 1762.
It was the world's first mutual insurer and it
pioneered age based premiums based on
mortality rate laying "the framework for scientific
insurance practice and development" and "the
basis of modern life assurance upon which all
life assurance schemes were subsequently
based." [9]
In the late 19th century "accident insurance"
began to become available. [10] The first
company to offer accident insurance was the
Railway Passengers Assurance Company, formed
in 1848 in England to insure against the rising
number of fatalities on the nascent railway
system.
By the late 19th century governments began to
initiate national insurance programs against
sickness and old age. Germany built on a
tradition of welfare programs in Prussia and
Saxony that began as early as in the 1840s. In
the 1880s Chancellor Otto von Bismarck
introduced old age pensions, accident insurance
and medical care that formed the basis for
Germany's welfare state . [11][12] In Britain more
extensive legislation was introduced by the
Liberal government in the 1911 National
Insurance Act . This gave the British working
classes the first contributory system of insurance
against illness and unemployment. [13] This
system was greatly expanded after the Second
World War under the influence of the Beveridge
Report, to form the first modern welfare
state . [11][14]
Principles
Insurance involves pooling funds from many
insured entities (known as exposures) to pay for
the losses that some may incur. The insured
entities are therefore protected from risk for a
fee, with the fee being dependent upon the
frequency and severity of the event occurring. In
order to be an insurable risk , the risk insured
against must meet certain characteristics.
Insurance as a financial intermediary is a
commercial enterprise and a major part of the
financial services industry, but individual entities
can also self-insure through saving money for
possible future losses. [15]
Insurability
Main article: Insurability
Risk which can be insured by private companies
typically shares seven common
characteristics: [16]
1. Large number of similar exposure units:
Since insurance operates through pooling
resources, the majority of insurance policies are
provided for individual members of large
classes, allowing insurers to benefit from the law
of large numbers in which predicted losses are
similar to the actual losses. Exceptions include
Lloyd's of London , which is famous for ensuring
the life or health of actors, sports figures, and
other famous individuals. However, all exposures
will have particular differences, which may lead
to different premium rates.
2. Definite loss : The loss takes place at a
known time, in a known place, and from a
known cause. The classic example is death of
an insured person on a life insurance policy.
Fire, automobile accidents , and worker injuries
may all easily meet this criterion. Other types of
losses may only be definite in theory.
Occupational disease , for instance, may involve
prolonged exposure to injurious conditions where
no specific time, place, or cause is identifiable.
Ideally, the time, place, and cause of a loss
should be clear enough that a reasonable
person, with sufficient information, could
objectively verify all three elements.
3. Accidental loss : The event that constitutes
the trigger of a claim should be fortuitous, or at
least outside the control of the beneficiary of the
insurance. The loss should be pure, in the sense
that it results from an event for which there is
only the opportunity for cost. Events that contain
speculative elements such as ordinary business
risks or even purchasing a lottery ticket are
generally not considered insurable.
4. Large loss : The size of the loss must be
meaningful from the perspective of the insured.
Insurance premiums need to cover both the
expected cost of losses, plus the cost of issuing
and administering the policy, adjusting losses,
and supplying the capital needed to reasonably
assure that the insurer will be able to pay
claims. For small losses, these latter costs may
be several times the size of the expected cost
of losses. There is hardly any point in paying
such costs unless the protection offered has real
value to a buyer.
5. Affordable premium : If the likelihood of an
insured event is so high, or the cost of the event
so large, that the resulting premium is large
relative to the amount of protection offered, then
it is not likely that the insurance will be
purchased, even if on offer. Furthermore, as the
accounting profession formally recognizes in
financial accounting standards, the premium
cannot be so large that there is not a reasonable
chance of a significant loss to the insurer. If
there is no such chance of loss, then the
transaction may have the form of insurance, but
not the substance (see the U.S. Financial
Accounting Standards Board pronouncement
number 113: "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration
Contracts").
6. Calculable loss: There are two elements that
must be at least estimable, if not formally
calculable: the probability of loss, and the
attendant cost. Probability of loss is generally an
empirical exercise, while cost has more to do
with the ability of a reasonable person in
possession of a copy of the insurance policy
and a proof of loss associated with a claim
presented under that policy to make a
reasonably definite and objective evaluation of
the amount of the loss recoverable as a result of
the claim.
7. Limited risk of catastrophically large losses:
Insurable losses are ideally independent and
non-catastrophic, meaning that the losses do not
happen all at once and individual losses are not
severe enough to bankrupt the insurer; insurers
may prefer to limit their exposure to a loss from
a single event to some small portion of their
capital base. Capital constrains insurers' ability
to sell earthquake insurance as well as wind
insurance in hurricane zones. In the United
States, flood risk is insured by the federal
government. In commercial fire insurance, it is
possible to find single properties whose total
exposed value is well in excess of any individual
insurer's capital constraint. Such properties are
generally shared among several insurers, or are
insured by a single insurer who syndicates the
risk into the reinsurance market.
Legal
When a company insures an individual entity,
there are basic legal requirements and
regulations. Several commonly cited legal
principles of insurance include: [17]
1. Indemnity – the insurance company
indemnifies, or compensates, the insured in the
case of certain losses only up to the insured's
interest.
2. Benefit insurance – as it is stated in the
study books of The Chartered Insurance Institute,
the insurance company does not have the right
of recovery from the party who caused the injury
and is to compensate the Insured regardless of
the fact that Insured had already sued the
negligent party for the damages (for example,
personal accident insurance)
3. Insurable interest – the insured typically must
directly suffer from the loss. Insurable interest
must exist whether property insurance or
insurance on a person is involved. The concept
requires that the insured have a "stake" in the
loss or damage to the life or property insured.
What that "stake" is will be determined by the
kind of insurance involved and the nature of the
property ownership or relationship between the
persons. The requirement of an insurable interest
is what distinguishes insurance from gambling.
4. Utmost good faith – (Uberrima fides ) the
insured and the insurer are bound by a good
faith bond of honesty and fairness. Material
facts must be disclosed.
5. Contribution – insurers which have similar
obligations to the insured contribute in the
indemnification, according to some method.
6. Subrogation – the insurance company
acquires legal rights to pursue recoveries on
behalf of the insured; for example, the insurer
may sue those liable for the insured's loss. The
Insurers can waive their subrogation rights by
using the special clauses.
7. Causa proxima, or proximate cause – the
cause of loss (the peril) must be covered under
the insuring agreement of the policy, and the
dominant cause must not be excluded
8. Mitigation – In case of any loss or casualty,
the asset owner must attempt to keep loss to a
minimum, as if the asset was not insured.
Indemnification
Main article: Indemnity
To "indemnify" means to make whole again, or
to be reinstated to the position that one was in,
to the extent possible, prior to the happening of
a specified event or peril. Accordingly, life
insurance is generally not considered to be
indemnity insurance, but rather "contingent"
insurance (i.e., a claim arises on the occurrence
of a specified event). There are generally three
types of insurance contracts that seek to
indemnify an insured:
1. A "reimbursement" policy
2. A "pay on behalf" or "on behalf of policy"[18]
3. An "indemnification" policy
From an insured's standpoint, the result is
usually the same: the insurer pays the loss and
claims expenses.
If the Insured has a "reimbursement" policy, the
insured can be required to pay for a loss and
then be "reimbursed" by the insurance carrier for
the loss and out of pocket costs including, with
the permission of the insurer, claim
expenses. [18][19]
Under a "pay on behalf" policy, the insurance
carrier would defend and pay a claim on behalf
of the insured who would not be out of pocket
for anything. Most modern liability insurance is
written on the basis of "pay on behalf" language
which enables the insurance carrier to manage
and control the claim.
Under an "indemnification" policy, the insurance
carrier can generally either "reimburse" or "pay
on behalf of", whichever is more beneficial to it
and the insured in the claim handling process.
An entity seeking to transfer risk (an individual,
corporation, or association of any type, etc.)
becomes the 'insured' party once risk is
assumed by an 'insurer', the insuring party, by
means of a contract , called an insurance policy.
Generally, an insurance contract includes, at a
minimum, the following elements: identification
of participating parties (the insurer, the insured,
the beneficiaries), the premium, the period of
coverage, the particular loss event covered, the
amount of coverage (i.e., the amount to be paid
to the insured or beneficiary in the event of a
loss), and exclusions (events not covered). An
insured is thus said to be "indemnified " against
the loss covered in the policy.
When insured parties experience a loss for a
specified peril, the coverage entitles the
policyholder to make a claim against the insurer
for the covered amount of loss as specified by
the policy. The fee paid by the insured to the
insurer for assuming the risk is called the
premium. Insurance premiums from many
insureds are used to fund accounts reserved for
later payment of claims – in theory for a
relatively few claimants – and for overhead
costs. So long as an insurer maintains adequate
funds set aside for anticipated losses (called
reserves), the remaining margin is an insurer's
profit .
Exclusions
Policies typically include a number of exclusions,
including typically:
Nuclear exclusion clause , excluding damage
caused by nuclear and radiation accidents
War exclusion clause , excluding damage form
acts of war or terrorism [20][21]
Social effects
Insurance can have various effects on society
through the way that it changes who bears the
cost of losses and damage. On one hand it can
increase fraud; on the other it can help societies
and individuals prepare for catastrophes and
mitigate the effects of catastrophes on both
households and societies.
Insurance can influence the probability of losses
through moral hazard, insurance fraud, and
preventive steps by the insurance company.
Insurance scholars have typically used moral
hazard to refer to the increased loss due to
unintentional carelessness and insurance fraud to
refer to increased risk due to intentional
carelessness or indifference. [22] Insurers
attempt to address carelessness through
inspections, policy provisions requiring certain
types of maintenance, and possible discounts for
loss mitigation efforts. While in theory insurers
could encourage investment in loss reduction,
some commentators have argued that in practice
insurers had historically not aggressively pursued
loss control measures—particularly to prevent
disaster losses such as hurricanes—because of
concerns over rate reductions and legal battles.
However, since about 1996 insurers have begun
to take a more active role in loss mitigation,
such as through building codes . [23]
Methods of insurance
According to the study books of The Chartered
Insurance Institute, there are variant methods of
insurance as follows:
1. Co-insurance – risks shared between insurers
2. Dual insurance – having two or more policies
with overlapping coverage of a risk (both the
individual policies would not pay separately –
under a concept named contribution, they would
contribute together to make up the policyholder's
losses. However, in case of contingency
insurances such as life insurance, dual payment
is allowed)
3. Self-insurance – situations where risk is not
transferred to insurance companies and solely
retained by the entities or individuals themselves
4. Reinsurance – situations when the insurer
passes some part of or all risks to another
Insurer, called the reinsurer
Insurers' business model
Play media
Accidents will happen (William H.
Watson, 1922) is a slapstick silent film
about the methods and mishaps of an
insurance broker. Collection EYE Film
Institute Netherlands .
Underwriting and investing
The business model is to collect more in
premium and investment income than is paid
out in losses, and to also offer a competitive
price which consumers will accept. Profit can be
reduced to a simple equation:
Profit = earned premium + investment income
– incurred loss – underwriting expenses.
Insurers make money in two ways:
Through underwriting, the process by which
insurers select the risks to insure and decide
how much in premiums to charge for
accepting those risks
By investing the premiums they collect from
insured parties
The most complicated aspect of the insurance
business is the actuarial science of ratemaking
(price-setting) of policies, which uses statistics
and probability to approximate the rate of future
claims based on a given risk. After producing
rates, the insurer will use discretion to reject or
accept risks through the underwriting process.
At the most basic level, initial ratemaking
involves looking at the frequency and severity of
insured perils and the expected average payout
resulting from these perils. Thereafter an
insurance company will collect historical loss
data, bring the loss data to present value , and
compare these prior losses to the premium
collected in order to assess rate adequacy. [24]
Loss ratios and expense loads are also used.
Rating for different risk characteristics involves
at the most basic level comparing the losses
with "loss relativities"—a policy with twice as
many losses would therefore be charged twice
as much. More complex multivariate analyses
are sometimes used when multiple
characteristics are involved and a univariate
analysis could produce confounded results.
Other statistical methods may be used in
assessing the probability of future losses.
Upon termination of a given policy, the amount
of premium collected minus the amount paid out
in claims is the insurer's underwriting profit on
that policy. Underwriting performance is
measured by something called the "combined
ratio", which is the ratio of expenses/losses to
premiums. [25] A combined ratio of less than
100% indicates an underwriting profit, while
anything over 100 indicates an underwriting loss.
A company with a combined ratio over 100%
may nevertheless remain profitable due to
investment earnings.
Insurance companies earn investment profits on
"float". Float, or available reserve, is the amount
of money on hand at any given moment that an
insurer has collected in insurance premiums but
has not paid out in claims. Insurers start
investing insurance premiums as soon as they
are collected and continue to earn interest or
other income on them until claims are paid out.
The Association of British Insurers (gathering
400 insurance companies and 94% of UK
insurance services) has almost 20% of the
investments in the London Stock Exchange . [26]
In 2007, U.S. industry profits from float totaled
$58 billion. In a 2009 letter to investors, Warren
Buffett wrote, "we were paid $2.8 billion to hold
our float in 2008." [27]
In the United States , the underwriting loss of
property and casualty insurance companies was
$142.3 billion in the five years ending 2003. But
overall profit for the same period was $68.4
billion, as the result of float. Some insurance
industry insiders, most notably Hank Greenberg ,
do not believe that it is forever possible to
sustain a profit from float without an
underwriting profit as well, but this opinion is not
universally held. Reliance on float for profit has
led some industry experts to call insurance
companies "investment companies that raise the
money for their investments by selling
insurance." [28]
Naturally, the float method is difficult to carry out
in an economically depressed period. Bear
markets do cause insurers to shift away from
investments and to toughen up their underwriting
standards, so a poor economy generally means
high insurance premiums. This tendency to
swing between profitable and unprofitable
periods over time is commonly known as the
underwriting, or insurance, cycle . [29]
Claims
Claims and loss handling is the materialized
utility of insurance; it is the actual "product" paid
for. Claims may be filed by insureds directly with
the insurer or through brokers or agents. The
insurer may require that the claim be filed on its
own proprietary forms, or may accept claims on
a standard industry form, such as those
produced by ACORD .
Insurance company claims departments employ
a large number of claims adjusters supported by
a staff of records management and data entry
clerks. Incoming claims are classified based on
severity and are assigned to adjusters whose
settlement authority varies with their knowledge
and experience. The adjuster undertakes an
investigation of each claim, usually in close
cooperation with the insured, determines if
coverage is available under the terms of the
insurance contract, and if so, the reasonable
monetary value of the claim, and authorizes
payment.
The policyholder may hire their own public
adjuster to negotiate the settlement with the
insurance company on their behalf. For policies
that are complicated, where claims may be
complex, the insured may take out a separate
insurance policy add-on, called loss recovery
insurance, which covers the cost of a public
adjuster in the case of a claim.
Adjusting liability insurance claims is particularly
difficult because there is a third party involved,
the plaintiff, who is under no contractual
obligation to cooperate with the insurer and may
in fact regard the insurer as a deep pocket . The
adjuster must obtain legal counsel for the
insured (either inside "house" counsel or outside
"panel" counsel), monitor litigation that may take
years to complete, and appear in person or over
the telephone with settlement authority at a
mandatory settlement conference when
requested by the judge.
If a claims adjuster suspects under-insurance,
the condition of average may come into play to
limit the insurance company's exposure.
In managing the claims handling function,
insurers seek to balance the elements of
customer satisfaction, administrative handling
expenses, and claims overpayment leakages. As
part of this balancing act, fraudulent insurance
practices are a major business risk that must be
managed and overcome. Disputes between
insurers and insureds over the validity of claims
or claims handling practices occasionally
escalate into litigation (see insurance bad faith ).
Marketing
Insurers will often use insurance agents to
initially market or underwrite their customers.
Agents can be captive, meaning they write only
for one company, or independent, meaning that
they can issue policies from several companies.
The existence and success of companies using
insurance agents is likely due to improved and
personalized service. Companies also use
Broking firms, Banks and other corporate entities
(like Self Help Groups, Microfinance Institutions,
NGOs, etc.) to market their products. [30]
Types
Any risk that can be quantified can potentially be
insured. Specific kinds of risk that may give rise
to claims are known as perils. An insurance
policy will set out in detail which perils are
covered by the policy and which are not. Below
are non-exhaustive lists of the many different
types of insurance that exist. A single policy that
may cover risks in one or more of the categories
set out below. For example, vehicle insurance
would typically cover both the property risk (theft
or damage to the vehicle) and the liability risk
(legal claims arising from an accident). A home
insurance policy in the United States typically
includes coverage for damage to the home and
the owner's belongings, certain legal claims
against the owner, and even a small amount of
coverage for medical expenses of guests who
are injured on the owner's property.
Business insurance can take a number of
different forms, such as the various kinds of
professional liability insurance, also called
professional indemnity (PI), which are discussed
below under that name; and the business
owner's policy (BOP), which packages into one
policy many of the kinds of coverage that a
business owner needs, in a way analogous to
how homeowners' insurance packages the
coverages that a homeowner needs. [31]
Auto insurance
Main article: Vehicle insurance
A wrecked vehicle in Copenhagen
Auto insurance protects the policyholder against
financial loss in the event of an incident
involving a vehicle they own, such as in a traffic
collision.
Coverage typically includes:
Property coverage, for damage to or theft of
the car
Liability coverage, for the legal responsibility
to others for bodily injury or property damage
Medical coverage, for the cost of treating
injuries, rehabilitation and sometimes lost
wages and funeral expenses
Gap insurance
Main article: Gap insurance
Gap insurance covers the excess amount on your
auto loan in an instance where your insurance
company does not cover the entire loan.
Depending on the company's specific policies it
might or might not cover the deductible as well.
This coverage is marketed for those who put low
down payments, have high interest rates on their
loans, and those with 60-month or longer terms.
Gap insurance is typically offered by a finance
company when the vehicle owner purchases their
vehicle, but many auto insurance companies
offer this coverage to consumers as well.
Health insurance
Main articles: Health insurance and Dental
insurance
Great Western Hospital, Swindon
Health insurance policies cover the cost of
medical treatments. Dental insurance, like
medical insurance, protects policyholders for
dental costs. In most developed countries, all
citizens receive some health coverage from their
governments, paid for by taxation. In most
countries, health insurance is often part of an
employer's benefits.
Income protection insurance
Workers' compensation , or employers'
liability insurance, is compulsory in
some countries
Disability insurance policies provide financial
support in the event of the policyholder
becoming unable to work because of
disabling illness or injury. It provides monthly
support to help pay such obligations as
mortgage loans and credit cards . Short-term
and long-term disability policies are available
to individuals, but considering the expense,
long-term policies are generally obtained only
by those with at least six-figure incomes, such
as doctors, lawyers, etc. Short-term disability
insurance covers a person for a period
typically up to six months, paying a stipend
each month to cover medical bills and other
necessities.
Long-term disability insurance covers an
individual's expenses for the long term, up
until such time as they are considered
permanently disabled and thereafter Insurance
companies will often try to encourage the
person back into employment in preference to
and before declaring them unable to work at
all and therefore totally disabled.
Disability overhead insurance allows business
owners to cover the overhead expenses of
their business while they are unable to work.
Total permanent disability insurance provides
benefits when a person is permanently
disabled and can no longer work in their
profession, often taken as an adjunct to life
insurance.
Workers' compensation insurance replaces all
or part of a worker's wages lost and
accompanying medical expenses incurred
because of a job-related injury.
Casualty insurance
Main article: Casualty insurance
Casualty insurance insures against accidents, not
necessarily tied to any specific property. It is a
broad spectrum of insurance that a number of
other types of insurance could be classified,
such as auto, workers compensation, and some
liability insurances.
Crime insurance is a form of casualty
insurance that covers the policyholder against
losses arising from the criminal acts of third
parties. For example, a company can obtain
crime insurance to cover losses arising from
theft or embezzlement.
Terrorism insurance provides protection
against any loss or damage caused by
terrorist activities. In the United States in the
wake of 9/11 , the Terrorism Risk Insurance
Act 2002 (TRIA) set up a federal program
providing a transparent system of shared
public and private compensation for insured
losses resulting from acts of terrorism. The
program was extended until the end of 2014
by the Terrorism Risk Insurance Program
Reauthorization Act 2007 (TRIPRA).
Kidnap and ransom insurance is designed to
protect individuals and corporations operating
in high-risk areas around the world against
the perils of kidnap, extortion, wrongful
detention and hijacking.
Political risk insurance is a form of casualty
insurance that can be taken out by businesses
with operations in countries in which there is
a risk that revolution or other political
conditions could result in a loss.
Life insurance
Main article: Life insurance
Amicable Society for a Perpetual
Assurance Office , Serjeants' Inn,
Fleet Street, London , 1801
Life insurance provides a monetary benefit to a
decedent's family or other designated
beneficiary, and may specifically provide for
income to an insured person's family, burial,
funeral and other final expenses. Life insurance
policies often allow the option of having the
proceeds paid to the beneficiary either in a lump
sum cash payment or an annuity. In most states,
a person cannot purchase a policy on another
person without their knowledge.
Annuities provide a stream of payments and are
generally classified as insurance because they
are issued by insurance companies, are
regulated as insurance, and require the same
kinds of actuarial and investment management
expertise that life insurance requires. Annuities
and pensions that pay a benefit for life are
sometimes regarded as insurance against the
possibility that a retiree will outlive his or her
financial resources. In that sense, they are the
complement of life insurance and, from an
underwriting perspective, are the mirror image of
life insurance.
Certain life insurance contracts accumulate cash
values, which may be taken by the insured if the
policy is surrendered or which may be borrowed
against. Some policies, such as annuities and
endowment policies, are financial instruments to
accumulate or liquidate wealth when it is
needed.
In many countries, such as the United States and
the UK, the tax law provides that the interest on
this cash value is not taxable under certain
circumstances. This leads to widespread use of
life insurance as a tax-efficient method of saving
as well as protection in the event of early death.
In the United States, the tax on interest income
on life insurance policies and annuities is
generally deferred. However, in some cases the
benefit derived from tax deferral may be offset
by a low return. This depends upon the insuring
company, the type of policy and other variables
(mortality, market return, etc.). Moreover, other
income tax saving vehicles (e.g., IRAs, 401(k)
plans, Roth IRAs) may be better alternatives for
value accumulation.
Burial insurance
Burial insurance is a very old type of life
insurance which is paid out upon death to cover
final expenses, such as the cost of a funeral .
The Greeks and Romans introduced burial
insurance c. 600 CE when they organized guilds
called "benevolent societies" which cared for the
surviving families and paid funeral expenses of
members upon death. Guilds in the Middle Ages
served a similar purpose, as did friendly
societies during Victorian times.
Property
Main article: Property insurance
This tornado damage to an Illinois home
would be considered an " Act of God" for
insurance purposes
Property insurance provides protection against
risks to property, such as fire , theft or weather
damage. This may include specialized forms of
insurance such as fire insurance, flood insurance ,
earthquake insurance , home insurance , inland
marine insurance or boiler insurance . The term
property insurance may, like casualty insurance,
be used as a broad category of various subtypes
of insurance, some of which are listed below:
US Airways Flight 1549 was written off
after ditching into the Hudson River
Aviation insurance protects aircraft hulls and
spares, and associated liability risks, such as
passenger and third-party liability. Airports
may also appear under this subcategory,
including air traffic control and refuelling
operations for international airports through to
smaller domestic exposures.
Boiler insurance (also known as boiler and
machinery insurance, or equipment breakdown
insurance) insures against accidental physical
damage to boilers, equipment or machinery.
Builder's risk insurance insures against the
risk of physical loss or damage to property
during construction. Builder's risk insurance is
typically written on an "all risk" basis covering
damage arising from any cause (including the
negligence of the insured) not otherwise
expressly excluded. Builder's risk insurance is
coverage that protects a person's or
organization's insurable interest in materials,
fixtures or equipment being used in the
construction or renovation of a building or
structure should those items sustain physical
loss or damage from an insured peril. [32]
Crop insurance may be purchased by farmers
to reduce or manage various risks associated
with growing crops. Such risks include crop
loss or damage caused by weather, hail,
drought, frost damage, insects, or
disease. [33] Index based crop insurance uses
models of how climate extremes affect crop
production to define certain climate triggers
that if surpassed have high probabilities of
causing substantial crop loss. When harvest
losses occur associated with exceeding the
climate trigger threshold, the index-insured
farmer is entitled to a compensation
payment. [34]
Earthquake insurance is a form of property
insurance that pays the policyholder in the
event of an earthquake that causes damage
to the property. Most ordinary home insurance
policies do not cover earthquake damage.
Earthquake insurance policies generally
feature a high deductible . Rates depend on
location and hence the likelihood of an
earthquake, as well as the construction of the
home.
Fidelity bond is a form of casualty insurance
that covers policyholders for losses incurred
as a result of fraudulent acts by specified
individuals. It usually insures a business for
losses caused by the dishonest acts of its
employees.
Hurricane Katrina caused over $80
billion of storm and flood damage
Flood insurance protects against property loss
due to flooding. Many U.S. insurers do not
provide flood insurance in some parts of the
country. In response to this, the federal
government created the National Flood
Insurance Program which serves as the
insurer of last resort.
Home insurance , also commonly called
hazard insurance or homeowners insurance
(often abbreviated in the real estate industry
as HOI), provides coverage for damage or
destruction of the policyholder's home. In
some geographical areas, the policy may
exclude certain types of risks, such as flood
or earthquake, that require additional
coverage. Maintenance-related issues are
typically the homeowner's responsibility. The
policy may include inventory, or this can be
bought as a separate policy, especially for
people who rent housing. In some countries,
insurers offer a package which may include
liability and legal responsibility for injuries
and property damage caused by members of
the household, including pets. [35]
Landlord insurance covers residential and
commercial properties which are rented to
others. Most homeowners' insurance covers
only owner-occupied homes.
Marine insurance and marine cargo insurance
cover the loss or damage of vessels at sea or
on inland waterway s, and of cargo in transit,
regardless of the method of transit. When the
owner of the cargo and the carrier are
separate corporations, marine cargo insurance
typically compensates the owner of cargo for
losses sustained from fire, shipwreck, etc.,
but excludes losses that can be recovered
from the carrier or the carrier's insurance.
Many marine insurance underwriters will
include "time element" coverage in such
policies, which extends the indemnity to cover
loss of profit and other business expenses
attributable to the delay caused by a covered
loss.
Supplemental natural disaster insurance
covers specified expenses after a natural
disaster renders the policyholder's home
uninhabitable. Periodic payments are made
directly to the insured until the home is rebuilt
or a specified time period has elapsed.
Surety bond insurance is a three-party
insurance guaranteeing the performance of the
principal.
The demand for terrorism insurance
surged after 9/11
Volcano insurance is a specialized insurance
protecting against damage arising specifically
from volcanic eruptions .
Windstorm insurance is an insurance covering
the damage that can be caused by wind
events such as hurricanes .
Liability
Main article: Liability insurance
Liability insurance is a very broad superset that
covers legal claims against the insured. Many
types of insurance include an aspect of liability
coverage. For example, a homeowner's insurance
policy will normally include liability coverage
which protects the insured in the event of a
claim brought by someone who slips and falls
on the property; automobile insurance also
includes an aspect of liability insurance that
indemnifies against the harm that a crashing car
can cause to others' lives, health, or property.
The protection offered by a liability insurance
policy is twofold: a legal defense in the event of
a lawsuit commenced against the policyholder
and indemnification (payment on behalf of the
insured) with respect to a settlement or court
verdict. Liability policies typically cover only the
negligence of the insured, and will not apply to
results of wilful or intentional acts by the
insured.
The subprime mortgage crisis was the
source of many liability insurance losses
Public liability insurance or general liability
insurance covers a business or organization
against claims should its operations injure a
member of the public or damage their
property in some way.
Directors and officers liability insurance (D&O)
protects an organization (usually a
corporation) from costs associated with
litigation resulting from errors made by
directors and officers for which they are
liable.
Environmental liability or environmental
impairment insurance protects the insured
from bodily injury, property damage and
cleanup costs as a result of the dispersal,
release or escape of pollutants.
Errors and omissions insurance (E&O) is
business liability insurance for professionals
such as insurance agents, real estate agents
and brokers, architects, third-party
administrators (TPAs) and other business
professionals.
Prize indemnity insurance protects the insured
from giving away a large prize at a specific
event. Examples would include offering prizes
to contestants who can make a half-court
shot at a basketball game, or a hole-in-one at
a golf tournament.
Professional liability insurance , also called
professional indemnity insurance (PI), protects
insured professionals such as architectural
corporations and medical practitioners against
potential negligence claims made by their
patients/clients. Professional liability
insurance may take on different names
depending on the profession. For example,
professional liability insurance in reference to
the medical profession may be called
medical malpractice insurance.
Often a commercial insured's liability insurance
program consists of several layers. The first
layer of insurance generally consists of primary
insurance, which provides first dollar indemnity
for judgments and settlements up to the limits
of liability of the primary policy. Generally,
primary insurance is subject to a deductible and
obligates the insured to defend the insured
against lawsuits, which is normally accomplished
by assigning counsel to defend the insured. In
many instances, a commercial insured may elect
to self-insure. Above the primary insurance or
self-insured retention, the insured may have one
or more layers of excess insurance to provide
coverage additional limits of indemnity
protection. There are a variety of types of excess
insurance, including "stand-alone" excess
policies (policies that contain their own terms,
conditions, and exclusions), "follow form" excess
insurance (policies that follow the terms of the
underlying policy except as specifically
provided), and "umbrella" insurance policies
(excess insurance that in some circumstances
could provide coverage that is broader than the
underlying insurance). [36]
Credit
Main article: Payment protection insurance
Credit insurance repays some or all of a loan
when the borrower is insolvent.
Mortgage insurance insures the lender against
default by the borrower. Mortgage insurance
is a form of credit insurance, although the
name "credit insurance" more often is used to
refer to policies that cover other kinds of
debt.
Many credit cards offer payment protection
plans which are a form of credit insurance.
Trade credit insurance is business insurance
over the accounts receivable of the insured.
The policy pays the policy holder for covered
accounts receivable if the debtor defaults on
payment.
Collateral protection insurance (CPI) insures
property (primarily vehicles) held as collateral
for loans made by lending institutions.
Other types
All-risk insurance is an insurance that covers
a wide range of incidents and perils, except
those noted in the policy. All-risk insurance is
different from peril-specific insurance that
cover losses from only those perils listed in
the policy. [37] In car insurance, all-risk policy
includes also the damages caused by the
own driver.
High-value horses may be insured under
a bloodstock policy
Bloodstock insurance covers individual horses
or a number of horses under common
ownership. Coverage is typically for mortality
as a result of accident, illness or disease but
may extend to include infertility, in-transit
loss, veterinary fees, and prospective foal.
Business interruption insurance covers the
loss of income, and the expenses incurred,
after a covered peril interrupts normal
business operations.
Defense Base Act (DBA) insurance provides
coverage for civilian workers hired by the
government to perform contracts outside the
United States and Canada. DBA is required for
all U.S. citizens, U.S. residents, U.S. Green
Card holders, and all employees or
subcontractors hired on overseas government
contracts. Depending on the country, foreign
nationals must also be covered under DBA.
This coverage typically includes expenses
related to medical treatment and loss of
wages, as well as disability and death
benefits.
Expatriate insurance provides individuals and
organizations operating outside of their home
country with protection for automobiles,
property, health, liability and business
pursuits.
Legal expenses insurance covers
policyholders for the potential costs of legal
action against an institution or an individual.
When something happens which triggers the
need for legal action, it is known as "the
event". There are two main types of legal
expenses insurance: before the event
insurance and after the event insurance .
Livestock insurance is a specialist policy
provided to, for example, commercial or
hobby farms, aquariums, fish farms or any
other animal holding. Cover is available for
mortality or economic slaughter as a result of
accident, illness or disease but can extend to
include destruction by government order.
Media liability insurance is designed to cover
professionals that engage in film and
television production and print, against risks
such as defamation.
Nuclear incident insurance covers damages
resulting from an incident involving radioactive
materials and is generally arranged at the
national level. (See the nuclear exclusion
clause and, for the United States, the Price–
Anderson Nuclear Industries Indemnity Act .)
Pet insurance insures pets against accidents
and illnesses; some companies cover routine/
wellness care and burial, as well.
Pollution insurance usually takes the form of
first-party coverage for contamination of
insured property either by external or on-site
sources. Coverage is also afforded for liability
to third parties arising from contamination of
air, water, or land due to the sudden and
accidental release of hazardous materials
from the insured site. The policy usually
covers the costs of cleanup and may include
coverage for releases from underground
storage tanks. Intentional acts are specifically
excluded.
Purchase insurance is aimed at providing
protection on the products people purchase.
Purchase insurance can cover individual
purchase protection, warranties , guarantees ,
care plans and even mobile phone insurance.
Such insurance is normally very limited in the
scope of problems that are covered by the
policy.
Tax insurance is increasingly being used in
corporate transactions to protect taxpayers in
the event that a tax position it has taken is
challenged by the IRS or a state, local, or
foreign taxing authority [38]
Title insurance provides a guarantee that title
to real property is vested in the purchaser or
mortgagee , free and clear of liens or
encumbrances. It is usually issued in
conjunction with a search of the public
records performed at the time of a real estate
transaction.
Travel insurance is an insurance cover taken
by those who travel abroad, which covers
certain losses such as medical expenses, loss
of personal belongings, travel delay, and
personal liabilities.
Tuition insurance insures students against
involuntary withdrawal from cost-intensive
educational institutions
Interest rate insurance protects the holder
from adverse changes in interest rates, for
instance for those with a variable rate loan or
mortgage
Divorce insurance is a form of contractual
liability insurance that pays the insured a cash
benefit if their marriage ends in divorce.
Insurance financing vehicles
Fraternal insurance is provided on a
cooperative basis by fraternal benefit
societies or other social organizations. [39]
No-fault insurance is a type of insurance
policy (typically automobile insurance) where
insureds are indemnified by their own insurer
regardless of fault in the incident.
Protected self-insurance is an alternative risk
financing mechanism in which an organization
retains the mathematically calculated cost of
risk within the organization and transfers the
catastrophic risk with specific and aggregate
limits to an insurer so the maximum total
cost of the program is known. A properly
designed and underwritten Protected Self-
Insurance Program reduces and stabilizes the
cost of insurance and provides valuable risk
management information.
Retrospectively rated insurance is a method
of establishing a premium on large
commercial accounts. The final premium is
based on the insured's actual loss experience
during the policy term, sometimes subject to
a minimum and maximum premium, with the
final premium determined by a formula. Under
this plan, the current year's premium is based
partially (or wholly) on the current year's
losses, although the premium adjustments
may take months or years beyond the current
year's expiration date. The rating formula is
guaranteed in the insurance contract.
Formula: retrospective premium = converted
loss + basic premium × tax multiplier.
Numerous variations of this formula have
been developed and are in use.
Formal self-insurance is the deliberate
decision to pay for otherwise insurable losses
out of one's own money. [ citation needed] This
can be done on a formal basis by
establishing a separate fund into which funds
are deposited on a periodic basis, or by
simply forgoing the purchase of available
insurance and paying out-of-pocket. Self-
insurance is usually used to pay for high-
frequency, low-severity losses. Such losses, if
covered by conventional insurance, mean
having to pay a premium that includes
loadings for the company's general expenses,
cost of putting the policy on the books,
acquisition expenses, premium taxes, and
contingencies. While this is true for all
insurance, for small, frequent losses the
transaction costs may exceed the benefit of
volatility reduction that insurance otherwise
affords. [ citation needed ]
Reinsurance is a type of insurance purchased
by insurance companies or self-insured
employers to protect against unexpected
losses. Financial reinsurance is a form of
reinsurance that is primarily used for capital
management rather than to transfer insurance
risk.
Social insurance can be many things to many
people in many countries. But a summary of
its essence is that it is a collection of
insurance coverages (including components
of life insurance, disability income insurance,
unemployment insurance, health insurance,
and others), plus retirement savings, that
requires participation by all citizens. By
forcing everyone in society to be a
policyholder and pay premiums, it ensures
that everyone can become a claimant when or
if he/she needs to. Along the way, this
inevitably becomes related to other concepts
such as the justice system and the welfare
state . This is a large, complicated topic that
engenders tremendous debate, which can be
further studied in the following articles (and
others):
National Insurance
Social safety net
Social security
Social Security debate (United States)
Social Security (United States)
Social welfare provision
Stop-loss insurance provides protection
against catastrophic or unpredictable losses.
It is purchased by organizations who do not
want to assume 100% of the liability for
losses arising from the plans. Under a stop-
loss policy, the insurance company becomes
liable for losses that exceed certain limits
called deductibles.
Closed community and
governmental self-insurance
Some communities prefer to create virtual
insurance amongst themselves by other means
than contractual risk transfer, which assigns
explicit numerical values to risk. A number of
religious groups, including the Amish and some
Muslim groups, depend on support provided by
their communities when disasters strike. The
risk presented by any given person is assumed
collectively by the community who all bear the
cost of rebuilding lost property and supporting
people whose needs are suddenly greater after a
loss of some kind. In supportive communities
where others can be trusted to follow community
leaders, this tacit form of insurance can work. In
this manner the community can even out the
extreme differences in insurability that exist
among its members. Some further justification is
also provided by invoking the moral hazard of
explicit insurance contracts.
In the United Kingdom , The Crown (which, for
practical purposes, meant the civil service ) did
not insure property such as government
buildings. If a government building was
damaged, the cost of repair would be met from
public funds because, in the long run, this was
cheaper than paying insurance premiums. Since
many UK government buildings have been sold
to property companies and rented back, this
arrangement is now less common and may have
disappeared altogether.
In the United States, the most prevalent form of
self-insurance is governmental risk management
pools. They are self-funded cooperatives,
operating as carriers of coverage for the majority
of governmental entities today, such as county
governments, municipalities, and school
districts. Rather than these entities independently
self-insure and risk bankruptcy from a large
judgment or catastrophic loss, such
governmental entities form a risk pool. Such
pools begin their operations by capitalization
through member deposits or bond issuance.
Coverage (such as general liability, auto liability,
professional liability, workers compensation, and
property) is offered by the pool to its members,
similar to coverage offered by insurance
companies. However, self-insured pools offer
members lower rates (due to not needing
insurance brokers), increased benefits (such as
loss prevention services) and subject matter
expertise. Of approximately 91,000 distinct
governmental entities operating in the United
States, 75,000 are members of self-insured
pools in various lines of coverage, forming
approximately 500 pools. Although a relatively
small corner of the insurance market, the annual
contributions (self-insured premiums) to such
pools have been estimated up to 17 billion
dollars annually. [40]
Insurance companies
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Certificate issued by Republic Fire
Insurance Co. of New York c. 1860
Insurance companies may sell any combination
of insurance types, but are often classified into
three groups: [41]
Life insurance companies, which sell life
insurance, annuities and pensions products
and bear similarities to asset management
businesses[41]
Non-life or property/casualty insurance
companies, which sell other types of
insurance.
Health insurers, which sometimes sell life
insurance or employee benefits as well
General insurance companies can be further
divided into these sub categories.
Standard lines
Excess lines
In most countries, life and non-life insurers are
subject to different regulatory regimes and
different tax and accounting rules. The main
reason for the distinction between the two types
of company is that life, annuity, and pension
business is very long-term in nature – coverage
for life assurance or a pension can cover risks
over many decades. By contrast, non-life
insurance cover usually covers a shorter period,
such as one year.
Mutual versus proprietary
Main article: Mutual insurance
Insurance companies are generally classified as
either mutual or proprietary companies. [42]
Mutual companies are owned by the
policyholders, while shareholders (who may or
may not own policies) own proprietary insurance
companies.
Demutualization of mutual insurers to form stock
companies, as well as the formation of a hybrid
known as a mutual holding company, became
common in some countries, such as the United
States, in the late 20th century. However, not all
states permit mutual holding companies.
Reinsurance companies
Reinsurance companies are insurance companies
that sell policies to other insurance companies,
allowing them to reduce their risks and protect
themselves from very large losses. The
reinsurance market is dominated by a few very
large companies, with huge reserves. A reinsurer
may also be a direct writer of insurance risks as
well.
Captive insurance Companies
Main article: Captive insurance
Captive insurance companies may be defined as
limited-purpose insurance companies
established with the specific objective of
financing risks emanating from their parent
group or groups. This definition can sometimes
be extended to include some of the risks of the
parent company's customers. In short, it is an
in-house self-insurance vehicle. Captives may
take the form of a "pure" entity (which is a 100%
subsidiary of the self-insured parent company);
of a "mutual" captive (which insures the
collective risks of members of an industry); and
of an "association" captive (which self-insures
individual risks of the members of a
professional, commercial or industrial
association). Captives represent commercial,
economic and tax advantages to their sponsors
because of the reductions in costs they help
create and for the ease of insurance risk
management and the flexibility for cash flows
they generate. Additionally, they may provide
coverage of risks which is neither available nor
offered in the traditional insurance market at
reasonable prices.
The types of risk that a captive can underwrite
for their parents include property damage, public
and product liability, professional indemnity,
employee benefits, employers' liability, motor
and medical aid expenses. The captive's
exposure to such risks may be limited by the
use of reinsurance.
Captives are becoming an increasingly important
component of the risk management and risk
financing strategy of their parent. This can be
understood against the following background:
Heavy and increasing premium costs in
almost every line of coverage
Difficulties in insuring certain types of
fortuitous risk
Differential coverage standards in various
parts of the world
Rating structures which reflect market trends
rather than individual loss experience
Insufficient credit for deductibles or loss
control efforts
Other forms
Other possible forms for an insurance company
include reciprocals, in which policyholders
reciprocate in sharing risks, and Lloyd's
organizations.
Admitted versus non-admitted
Admitted insurance companies are those in the
United States that have been admitted or
licensed by the state licensing agency. The
insurance they sell is called admitted insurance .
Non-admitted companies have not been
approved by the state licensing agency, but are
allowed to sell insurance under special
circumstances when they meet an insurance
need that admitted companies cannot or will not
meet. [43]
Insurance consultants
There are also companies known as "insurance
consultants". Like a mortgage broker, these
companies are paid a fee by the customer to
shop around for the best insurance policy
amongst many companies. Similar to an
insurance consultant, an 'insurance broker' also
shops around for the best insurance policy
amongst many companies. However, with
insurance brokers, the fee is usually paid in the
form of commission from the insurer that is
selected rather than directly from the client.
Neither insurance consultants nor insurance
brokers are insurance companies and no risks
are transferred to them in insurance transactions.
Third party administrators are companies that
perform underwriting and sometimes claims
handling services for insurance companies.
These companies often have special expertise
that the insurance companies do not have.
Financial stability and rating
The financial stability and strength of an
insurance company should be a major
consideration when buying an insurance contract.
An insurance premium paid currently provides
coverage for losses that might arise many years
in the future. For that reason, the viability of the
insurance carrier is very important. In recent
years, a number of insurance companies have
become insolvent, leaving their policyholders
with no coverage (or coverage only from a
government-backed insurance pool or other
arrangement with less attractive payouts for
losses). A number of independent rating
agencies provide information and rate the
financial viability of insurance companies.
Insurance companies are rated by various
agencies such as A. M. Best. The ratings
include the company's financial strength, which
measures its ability to pay claims. It also rates
financial instruments issued by the insurance
company, such as bonds, notes, and
securitization products.
Across the world
Life insurance premiums written in 2005
Non-life insurance premiums written in
2005
Global insurance premiums grew by 2.7% in
inflation-adjusted terms in 2010 to $4.3 trillion,
climbing above pre-crisis levels. The return to
growth and record premiums generated during
the year followed two years of decline in real
terms. Life insurance premiums increased by
3.2% in 2010 and non-life premiums by 2.1%.
While industrialised countries saw an increase in
premiums of around 1.4%, insurance markets in
emerging economies saw rapid expansion with
11% growth in premium income. The global
insurance industry was sufficiently capitalised to
withstand the financial crisis of 2008 and 2009
and most insurance companies restored their
capital to pre-crisis levels by the end of 2010.
With the continuation of the gradual recovery of
the global economy, it is likely the insurance
industry will continue to see growth in premium
income both in industrialised countries and
emerging markets in 2011.
Advanced economies account for the bulk of
global insurance. With premium income of $1.62
trillion, Europe was the most important region in
2010, followed by North America $1.409 trillion
and Asia $1.161 trillion. Europe has however
seen a decline in premium income during the
year in contrast to the growth seen in North
America and Asia. The top four countries
generated more than a half of premiums. The
United States and Japan alone accounted for
40% of world insurance, much higher than their
7% share of the global population. Emerging
economies accounted for over 85% of the
world's population but only around 15% of
premiums. Their markets are however growing at
a quicker pace. [44] The country expected to
have the biggest impact on the insurance share
distribution across the world is China. According
to Sam Radwan of ENHANCE International LLC,
low premium penetration (insurance premium as
a % of GDP), an ageing population and the
largest car market in terms of new sales,
premium growth has averaged 15–20% in the
past five years, and China is expected to be the
largest insurance market in the next decade or
two. [45]
Regulatory differences
Main article: Insurance law
In the United States, insurance is regulated by
the states under the McCarran-Ferguson Act ,
with "periodic proposals for federal intervention",
and a nonprofit coalition of state insurance
agencies called the National Association of
Insurance Commissioners works to harmonize
the country's different laws and regulations. [46]
The National Conference of Insurance Legislators
(NCOIL) also works to harmonize the different
state laws. [47]
In the European Union, the Third Non-Life
Directive and the Third Life Directive, both
passed in 1992 and effective 1994, created a
single insurance market in Europe and allowed
insurance companies to offer insurance anywhere
in the EU (subject to permission from authority
in the head office) and allowed insurance
consumers to purchase insurance from any
insurer in the EU. [48] As far as insurance in the
United Kingdom , the Financial Services Authority
took over insurance regulation from the General
Insurance Standards Council in 2005; [49] laws
passed include the Insurance Companies Act
1973 and another in 1982, [50] and reforms to
warranty and other aspects under discussion as
of 2012. [51]
The insurance industry in China was nationalized
in 1949 and thereafter offered by only a single
state-owned company, the People's Insurance
Company of China , which was eventually
suspended as demand declined in a communist
environment. In 1978, market reforms led to an
increase in the market and by 1995 a
comprehensive Insurance Law of the People's
Republic of China [52] was passed, followed in
1998 by the formation of China Insurance
Regulatory Commission (CIRC), which has broad
regulatory authority over the insurance market of
China. [53]
In India IRDA is insurance regulatory authority. As
per the section 4 of IRDA Act 1999, Insurance
Regulatory and Development Authority (IRDA),
which was constituted by an act of parliament.
National Insurance Academy, Pune is apex
insurance capacity builder institute promoted
with support from Ministry of Finance and by
LIC, Life & General Insurance companies.
In 2017, within the framework of the joint project
of the Bank of Russia and Yandex , a special
check mark (a green circle with a tick and
'Реестр ЦБ РФ' (Unified state register of
insurance entities) text box) appeared in the
search for Yandex system, informing the
consumer that the company's financial services
are offered on the marked website, which has
the status of an insurance company, a broker or
a mutual insurance association. [54]
Controversies
Does not reduce the risk
Insurance is just a risk transfer mechanism
wherein the financial burden which may arise due
to some fortuitous event is transferred to a
bigger entity called an Insurance Company by
way of paying premiums. This only reduces the
financial burden and not the actual chances of
happening of an event. Insurance is a risk for
both the insurance company and the insured.
The insurance company understands the risk
involved and will perform a risk assessment
when writing the policy. As a result, the
premiums may go up if they determine that the
policyholder will file a claim. If a person is
financially stable and plans for life's unexpected
events, they may be able to go without
insurance. However, they must have enough to
cover a total and complete loss of employment
and of their possessions. Some states will
accept a surety bond, a government bond, or
even making a cash deposit with the
state. [ citation needed]
Insurance insulates too much
An insurance company may inadvertently find that
its insureds may not be as risk-averse as they
might otherwise be (since, by definition, the
insured has transferred the risk to the insurer), a
concept known as moral hazard. This 'insulates'
many from the true costs of living with risk,
negating measures that can mitigate or adapt to
risk and leading some to describe insurance
schemes as potentially maladaptive. [55] To
reduce their own financial exposure, insurance
companies have contractual clauses that mitigate
their obligation to provide coverage if the
insured engages in behavior that grossly
magnifies their risk of loss or
liability. [ citation needed ]
For example, life insurance companies may
require higher premiums or deny coverage
altogether to people who work in hazardous
occupations or engage in dangerous sports.
Liability insurance providers do not provide
coverage for liability arising from intentional torts
committed by or at the direction of the insured.
Even if a provider desired to provide such
coverage, it is against the public policy of most
countries to allow such insurance to exist, and
thus it is usually illegal. [ citation needed ]
Complexity of insurance policy
contracts
9/11 was a major insurance loss, but
there were disputes over the World
Trade Center 's insurance policy
Insurance policies can be complex and some
policyholders may not understand all the fees
and coverages included in a policy. As a result,
people may buy policies on unfavorable terms.
In response to these issues, many countries have
enacted detailed statutory and regulatory
regimes governing every aspect of the insurance
business, including minimum standards for
policies and the ways in which they may be
advertised and sold.
For example, most insurance policies in the
English language today have been carefully
drafted in plain English; the industry learned the
hard way that many courts will not enforce
policies against insureds when the judges
themselves cannot understand what the policies
are saying. Typically, courts construe
ambiguities in insurance policies against the
insurance company and in favor of coverage
under the policy.
Many institutional insurance purchasers buy
insurance through an insurance broker. While on
the surface it appears the broker represents the
buyer (not the insurance company), and typically
counsels the buyer on appropriate coverage and
policy limitations, in the vast majority of cases a
broker's compensation comes in the form of a
commission as a percentage of the insurance
premium, creating a conflict of interest in that
the broker's financial interest is tilted towards
encouraging an insured to purchase more
insurance than might be necessary at a higher
price. A broker generally holds contracts with
many insurers, thereby allowing the broker to
"shop" the market for the best rates and
coverage possible.
Insurance may also be purchased through an
agent. A tied agent, working exclusively with one
insurer, represents the insurance company from
whom the policyholder buys (while a free agent
sells policies of various insurance companies).
Just as there is a potential conflict of interest
with a broker, an agent has a different type of
conflict. Because agents work directly for the
insurance company, if there is a claim the agent
may advise the client to the benefit of the
insurance company. Agents generally cannot
offer as broad a range of selection compared to
an insurance broker.
An independent insurance consultant advises
insureds on a fee-for-service retainer, similar to
an attorney, and thus offers completely
independent advice, free of the financial conflict
of interest of brokers or agents. However, such a
consultant must still work through brokers or
agents in order to secure coverage for their
clients.
Limited consumer benefits
In the United States, economists and consumer
advocates generally consider insurance to be
worthwhile for low-probability, catastrophic
losses, but not for high-probability, small losses.
Because of this, consumers are advised to select
high deductibles and to not insure losses which
would not cause a disruption in their life.
However, consumers have shown a tendency to
prefer low deductibles and to prefer to insure
relatively high-probability, small losses over low-
probability, perhaps due to not understanding or
ignoring the low-probability risk. This is
associated with reduced purchasing of insurance
against low-probability losses, and may result in
increased inefficiencies from moral hazard. [56]
Redlining
Redlining is the practice of denying insurance
coverage in specific geographic areas,
supposedly because of a high likelihood of loss,
while the alleged motivation is unlawful
discrimination. Racial profiling or redlining has a
long history in the property insurance industry in
the United States. From a review of industry
underwriting and marketing materials, court
documents, and research by government
agencies, industry and community groups, and
academics, it is clear that race has long affected
and continues to affect the policies and
practices of the insurance industry. [57]
In July 2007, The Federal Trade Commission
(FTC) released a report presenting the results of
a study concerning credit-based insurance
scores in automobile insurance. The study found
that these scores are effective predictors of risk.
It also showed that African-Americans and
Hispanics are substantially overrepresented in
the lowest credit scores, and substantially
underrepresented in the highest, while
Caucasians and Asians are more evenly spread
across the scores. The credit scores were also
found to predict risk within each of the ethnic
groups, leading the FTC to conclude that the
scoring models are not solely proxies for
redlining. The FTC indicated little data was
available to evaluate benefit of insurance scores
to consumers. [58] The report was disputed by
representatives of the Consumer Federation of
America , the National Fair Housing Alliance, the
National Consumer Law Center, and the Center
for Economic Justice, for relying on data
provided by the insurance industry. [59]
All states have provisions in their rate regulation
laws or in their fair trade practice acts that
prohibit unfair discrimination, often called
redlining, in setting rates and making insurance
available. [60]
In determining premiums and premium rate
structures, insurers consider quantifiable factors,
including location, credit scores , gender ,
occupation , marital status , and education level.
However, the use of such factors is often
considered to be unfair or unlawfully
discriminatory , and the reaction against this
practice has in some instances led to political
disputes about the ways in which insurers
determine premiums and regulatory intervention
to limit the factors used.
An insurance underwriter's job is to evaluate a
given risk as to the likelihood that a loss will
occur. Any factor that causes a greater likelihood
of loss should theoretically be charged a higher
rate. This basic principle of insurance must be
followed if insurance companies are to remain
solvent. [ citation needed ] Thus, "discrimination"
against (i.e., negative differential treatment of)
potential insureds in the risk evaluation and
premium-setting process is a necessary by-
product of the fundamentals of insurance
underwriting. For instance, insurers charge older
people significantly higher premiums than they
charge younger people for term life insurance.
Older people are thus treated differently from
younger people (i.e., a distinction is made,
discrimination occurs). The rationale for the
differential treatment goes to the heart of the
risk a life insurer takes: Old people are likely to
die sooner than young people, so the risk of
loss (the insured's death) is greater in any given
period of time and therefore the risk premium
must be higher to cover the greater risk.
However, treating insureds differently when there
is no actuarially sound reason for doing so is
unlawful discrimination.
Insurance patents
This article needs to be updated. Please update
this article to reflect recent events or newly
available information. (January 2018)
Further information: Insurance patent
New assurance products can now be protected
from copying with a business method patent in
the United States .
A recent example of a new insurance product
that is patented is Usage Based auto insurance .
Early versions were independently invented and
patented by a major US auto insurance company,
Progressive Auto Insurance (U.S. Patent
5,797,134 ) and a Spanish independent
inventor, Salvador Minguijon Perez ( ‹See Tfd› EP
0700009 ).
Many independent inventors are in favor of
patenting new insurance products since it gives
them protection from big companies when they
bring their new insurance products to market.
Independent inventors account for 70% of the
new U.S. patent applications in this area.
Many insurance executives are opposed to
patenting insurance products because it creates
a new risk for them. The Hartford insurance
company, for example, recently had to pay $80
million to an independent inventor, Bancorp
Services, in order to settle a patent infringement
and theft of trade secret lawsuit for a type of
corporate owned life insurance product invented
and patented by Bancorp.
There are currently about 150 new patent
applications on insurance inventions filed per
year in the United States. The rate at which
patents have been issued has steadily risen from
15 in 2002 to 44 in 2006. [61]
The first insurance patent to be granted was [62]
including another example of an application
posted was US2009005522 "risk assessment
company" . It was posted on March 6, 2009.
This patent application describes a method for
increasing the ease of changing insurance
companies. [63]
Insurance on demand
Insurance on demand (also IoD) is an insurance
service that provides clients with insurance
protection when they need, i.e. only episodic
rather than on 24/7 basis as typically provided
by traditional insurers (e.g. clients can purchase
an insurance for one single flight rather than a
longer-lasting travel insurance plan).
Insurance industry and rent-
seeking
Certain insurance products and practices have
been described as rent-seeking by
critics. [ citation needed ] That is, some insurance
products or practices are useful primarily
because of legal benefits, such as reducing
taxes, as opposed to providing protection
against risks of adverse events. Under United
States tax law , for example, most owners of
variable annuities and variable life insurance can
invest their premium payments in the stock
market and defer or eliminate paying any taxes
on their investments until withdrawals are made.
Sometimes this tax deferral is the only reason
people use these products. [ citation needed ]
Another example is the legal infrastructure which
allows life insurance to be held in an irrevocable
trust which is used to pay an estate tax while the
proceeds themselves are immune from the
estate tax.
Religious concerns
Muslim scholars have varying opinions about life
insurance. Life insurance policies that earn
interest (or guaranteed bonus/NAV) are generally
considered to be a form of riba [64] ( usury ) and
some consider even policies that do not earn
interest to be a form of gharar (speculation ).
Some argue that gharar is not present due to the
actuarial science behind the underwriting. [65]
Jewish rabbinical scholars also have expressed
reservations regarding insurance as an avoidance
of God's will but most find it acceptable in
moderation. [66]
Some Christians believe insurance represents a
lack of faith [67][68] and there is a long history
of resistance to commercial insurance in
Anabaptist communities ( Mennonites, Amish,
Hutterites, Brethren in Christ) but many
participate in community-based self-insurance
programs that spread risk within their
communities. [69][70][71]
See also
Agent of Record
Earthquake loss
Financial adviser
Financial services (broader industry to which
insurance belongs)
Geneva Association (the International
Association for the Study of Insurance
Economics)
Global assets under management
Insurance broker
Insurance fraud
Insurance Hall of Fame
Insurance law
Insurance Premium Tax (UK)
List of Acts of Parliament of the United
Kingdom Parliament, 1960-1979
Loss-control consultant
Reinsurance
Intergovernmental Risk Pool
The Invisible Bankers: Everything the Insurance
Industry Never Wanted You to Know (book)
List of finance topics
List of insurance topics
List of United States insurance companies
Social security
Uberrima fides
Universal health care
Welfare state
Country-specific articles:
Insurance in Australia
Insurance in India
Insurance in the United States
Insurance in the United Kingdom
Notes
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