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, uncertain loss.
An entity which provides insurance is known as an insurer, insurance company, or insurance carrier. A person or entity who buys insurance is known as an insured or 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 must involve something in which the insured has an insurable interest established by ownership, possession, or preexisting relationship.
The insured receives a contract , called the insurance policy , which details the conditions and circumstances under which the insured will be financially compensated. The amount of money charged by the insurer to the insured 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 .
* 1 History
* 1.1 Early methods * 1.2 Modern insurance
* 2 Principles
* 2.1 Insurability * 2.2 Legal * 2.3 Indemnification
* 3 Social effects
* 3.1 Methods of insurance
* 4 Insurers\' business model
* 4.1 Underwriting and investing * 4.2 Claims * 4.3 Marketing
* 5 Types
* 5.1 Auto insurance
Income protection insurance
* 5.7 Burial insurance
* 5.8 Property
* 5.9 Liability
* 5.10 Credit
* 5.11 Other types
* 7 Across the world
* 7.1 Regulatory differences
* 8 Controversies
* 8.1 Does not reduce the risk
* 9 See also * 10 Notes * 11 Bibliography * 12 External links
History of insurance
Merchants have sought methods to minimize risks since early
times. Pictured, Governors of the Wine Merchant's
Methods for transferring or distributing risk were practiced by Chinese and Babylonian 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'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.
At some point in the 1st millennium 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 to storm or sinkage.
Separate insurance contracts (i.e., insurance policies not bundled
with loans or other kinds of contracts) were invented in
Property insurance as we know it today can be traced to the Great
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
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
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
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 . 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 .
Main article: Insurability
Risk which can be insured by private companies typically shares seven common characteristics:
* 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
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
* Benefit insurance – as it is stated in the study books of The
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:
* A "reimbursement" policy * A "pay on behalf" or "on behalf of policy" * 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.
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
METHODS OF INSURANCE
In accordance with study books of The Chartered
* Co-insurance – risks shared between insurers * Dual insurance – risks having two or more policies with same coverage (Both the individual policies would not pay separately- a concept named contribution, and would contribute together to make up the policyholder's losses. However, in case of contingency insurances like Life insurance, dual payment is allowed) * Self-insurance – situations where risk is not transferred to insurance companies and solely retained by the entities or individuals themselves * Reinsurance – situations when Insurer passes some part of or all risks to another Insurer called 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
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. 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. 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.
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 .
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 .
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 ).
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.
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
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
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 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
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
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
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 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
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.
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.
* 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. * 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
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"> 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.
INSURANCE FINANCING VEHICLES
* Fraternal insurance is provided on a cooperative basis by
fraternal benefit societies or other social organizations.
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-
* 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):
* 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
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.
* Life insurance companies, which sell life insurance, annuities and pensions products. * Non-life or property /casualty insurance companies, which sell other types of insurance.
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.
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.
Other possible forms for an insurance company include reciprocals , in which policyholders reciprocate in sharing risks, and Lloyd's organizations.
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 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
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.
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.
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,
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
National Association of Insurance Commissioners works to
harmonize the country's different laws and regulations. The National
The insurance industry in
In India IRDA is insurance regulatory authority. As per the section 4
of IRDA Act 1999,
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. 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.
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.
COMPLEXITY OF INSURANCE POLICY CONTRACTS
9/11 was a major insurance loss, but there were disputes over the World Trade Center 's insurance policy
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.
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 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 .
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.
In July 2007, The
Federal Trade Commission
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.
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. 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.
New assurance products can now be protected from copying with a
business method patent in the
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
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.
Inventors can now have their insurance US patent applications reviewed by the public in the Peer to Patent program. The first insurance patent to be granted was 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.
INSURANCE INDUSTRY AND RENT-SEEKING
Certain insurance products and practices have been described as
rent-seeking by critics. 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
Some Christians believe insurance represents a lack of faith and
there is a long history of resistance to commercial insurance in
Anabaptist communities (
* Agent of Record
* ^ See, e.g., Vaughan, E. J., 1997, Risk Management, New York:
* ^ "Lex Rhodia: The Ancient Ancestor of Maritime Law - 800 BC".
* ^ J. Franklin, The Science of Conjecture: Evidence and
* Dickson, P. G. M. (1960). The Sun
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