Insurance Product

Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. 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 a policyholder, while a person or entity covered under the policy is called an insured. The insurance transaction involves the policyholder assuming a guaranteed, known, and relatively small loss in the form of a payment to the insurer (a premium) 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. Furthermore, it 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, or their designated beneficiary or assignee. 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. A mandatory out-of-pocket expense required by an insurance policy before an insurer will pay a claim is called a deductible (or if required by a health insurance policy, a copayment). The insurer may hedge its own risk by taking out reinsurance, whereby another insurance company agrees to carry some of the risks, especially if the primary insurer deems the risk too large for it to carry.

History

Early methods

Methods for transferring or distributing risk were practiced by Babylonian, Chinese and Indian traders as long ago as the 3rd and 2nd millennia BC, respectively. Chinese merchants travelling treacherous river rapids would redistribute their wares across many vessels to limit the loss due to any single vessel capsizing.

''Codex Hammurabi'' Law 238 (c. 1755–1750 BC) stipulated that a sea captain, ship-manager, or ship charterer that saved a ship from total loss was only required to pay one-half the value of the ship to the ship-owner. In the '' Digesta seu Pandectae'' (533), the second volume of the codification of laws ordered by Justinian I (527–565), a legal opinion written by the Roman jurist Paulus in 235 AD was included about the ''Lex Rhodia'' ("Rhodian law"). It articulates the general average principle of marine insurance established on the island of Rhodes in approximately 1000 to 800 BC, plausibly by the Phoenicians during the proposed Dorian invasion and emergence of the purported Sea Peoples during the Greek Dark Ages (c. 1100–c. 750).

The law of general average is the fundamental principle that underlies all insurance. In 1816, an archeological excavation in Minya, Egypt produced a Nerva–Antonine dynasty-era tablet from the ruins of the Temple of Antinous in Antinoöpolis, Aegyptus. The tablet prescribed the rules and membership dues of a burial society collegium established in Lanuvium, Italia in approximately 133 AD during the reign of Hadrian (117–138) of the Roman Empire. In 1851 AD, future U.S. Supreme Court Associate Justice Joseph P. Bradley (1870–1892 AD), once employed as an actuary for the Mutual Benefit Life Insurance Company, submitted an article to the '' Journal of the Institute of Actuaries''. His article detailed an historical account of a Severan dynasty-era life table compiled by the Roman jurist Ulpian in approximately 220 AD that was also included in the ''Digesta''.

Concepts of insurance has been also found in 3rd century BC Hindu scriptures such as Dharmasastra, Arthashastra and Manusmriti. The ancient Greeks had marine loans. Money was advanced on a ship or cargo, to be repaid with large interest if the voyage prospers. However, the money would not be repaid at all if the ship were lost, thus making the rate of interest high enough to pay for not only for the use of the capital but also for the risk of losing it (fully described by Demosthenes). Loans of this character have ever since been common in maritime lands under the name of bottomry and respondentia bonds.

The direct insurance of sea-risks for a premium paid independently of loans began in Belgium about 1300 AD.

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. In the next century, maritime insurance developed widely, and premiums were varied with risks. These new insurance contracts allowed insurance to be separated from investment, a separation of roles that first proved useful in marine insurance.

The earliest known policy of life insurance was made in the Royal Exchange, London, on the 18th of June 1583, for £383, 6s. 8d. for twelve months on the life of William Gibbons.

Modern methods

Insurance became far more sophisticated in Enlightenment-era Europe, where specialized varieties developed.

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." 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.

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 growth as a centre for trade was increasing due to the 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, including 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.

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.Anzovin, Steven, ''Famous First Facts'' 2000, item # 2422, H. W. Wilson Company, p. 121 ''The first life insurance company known of record was founded in 1706 by the Bishop of Oxford and the financier Thomas Allen in London, England. The company, called the Amicable Society for a Perpetual Assurance Office, collected annual premiums from policyholders and paid the nominees of deceased members from a common fund.'' Upon the same principle, 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."

In the late 19th century "accident insurance" began to become available. 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.

The first international insurance rule was the York Antwerp Rules (YAR) for the distribution of costs between ship and cargo in the event of general average. In 1873 the "Association for the Reform and Codification of the Law of Nations", the forerunner of the International Law Association (ILA), was founded in Brussels. It published the first YAR in 1890, before switching to the present title of the "International Law Association" in 1895.

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.E. P. Hennock, ''The Origin of the Welfare State in England and Germany, 1850–1914: Social Policies Compared'' (2007) 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. This system was greatly expanded after the Second World War under the influence of the Beveridge Report, to form the first modern welfare state.

In 2008, the International Network of Insurance Associations (INIA), then an informal network, became active and it has been succeeded by the Global Federation of Insurance Associations (GFIA), which was formally founded in 2012 to aim to increase insurance industry effectiveness in providing input to international regulatory bodies and to contribute more effectively to the international dialogue on issues of common interest. It consists of its 40 member associations and 1 observer association in 67 countries, which companies account for around 89% of total insurance premiums worldwide.

Principles

Insurance involves pooling funds from ''many'' insured entities (known as exposures) to pay for the losses that only some insureds 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.

Insurability

Risk which can be insured by private companies typically share seven common characteristics:

# Large number of similar exposure units: Since insurance operates through pooling resources, the majority of insurance policies cover 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 insuring 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.
# Definite loss: This type of loss takes place at a known time and place from a known cause. The classic example involves the 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.
# 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.
# 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.
# 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 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").
# 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.
# 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 that 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, the federal government insures flood risk in specifically identified areas. 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 which 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:
# Indemnity – the insurance company indemnifies or compensates the insured in the case of certain losses only up to the insured's interest.
# 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 must compensate the Insured regardless of the fact that Insured had already sued the negligent party for the damages (for example, personal accident insurance)
# 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.
# 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.
# Contribution – insurers, which have similar obligations to the insured, contribute in the indemnification, according to some method.
# 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.
# 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

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