InsuranceFrom Wikipedia the free encyclopedia• •Jump to: . The examples and perspective in this article or section may not represent a of the subject. Please or discuss the issue on the. This article or section needs for grammar style cohesion tone or spelling. You can assist by now. A how-to is available. Insurance companies series • • Insurance in and is a form of primarily used to against the of a contingent loss. Insurance is defined as the equitable transfer of the risk of a loss from one entity to another in exchange for a premium. Insurer in economics is the company that sells the insurance. Insurance rate is a factor used to determine the amount called the premium to be charged for a certain amount of insurance coverage the practice of appraising and controlling risk has evolved as a discrete field of study and practice. Contents[]//[] Principles of insuranceCommercially insurable risks typically share seven common characteristics. A large number of homogeneous exposure units. The vast majority of insurance policies are provided for individual members of very large classes. Automobile insurance for example covered about 175 million automobiles in the United States in 2004. The existence of a large number of homogeneous exposure units allows insurers to benefit from the so-called “,” which in effect states that as the number of exposure units increases the actual results are increasingly likely to become close to expected results. There are exceptions to this criterion is famous for insuring the life or health of actors actresses and sports figures. Satellite Launch insurance covers events that are infrequent. Large commercial property policies may insure exceptional properties for which there are no ‘homogeneous’ exposure units. Despite failing on this criterion many exposures like these are generally considered to be insurable. Definite Loss. The event that gives rise to the loss that is subject to insurance should at least in principle take place at a known time in a known place and from a known cause. The classic example is death of an insured 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 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 little 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 it is not likely that anyone will buy insurance even if on offer. Further as the accounting profession formally recognizes in financial accounting standards (See FAS 113 for example) 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 the transaction may have the form of insurance but not the substance. 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. The essential risk is often aggregation. If the same event can cause losses to numerous policyholders of the same insurer the ability of that insurer to issue policies becomes constrained not by factors surrounding the individual characteristics of a given policyholder but by the factors surrounding the sum of all policyholders so exposed. Typically insurers prefer to limit their exposure to a loss from a single event to some small portion of their capital base on the order of 5. Where the loss can be aggregated or an individual policy could produce exceptionally large claims the capital constraint will restrict an insurers appetite for additional policyholders. The classic example is earthquake insurance where the ability of an underwriter to issue a new policy depends on the number and size of the policies that it has already underwritten. Wind insurance in hurricane zones particularly along coast lines is another example of this phenomenon. In extreme cases the aggregation can affect the entire industry since the combined capital of insurers and reinsurers can be small compared to the needs of potential policyholders in areas exposed to aggregation risk. 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 market.[] IndemnificationThe technical definition of "indemnity" means to make whole again. There are two types of insurance contracts; 1) an "indemnity" policy and 2) a "pay on behalf" or "on behalf of" policy. The difference is significant on paper but rarely material in practice. An "indemnity" policy will not pay claims until the insured has paid out of pocket to some third party; i e a visitor to your home slips on a floor that you left wet and sues you for $10,000 and wins. Under an "indemnity" policy the homeowner would have to come up with the $10,000 to pay for the visitors fall and then would be "indemnified" by the insurance carrier for the out of pocket costs (the $10,000). Under the same situation a "pay on behalf" policy the insurance carrier would pay the claim and the insured (the homeowner) would not be out of pocket anything. Most modern liability insurance is written on the basis of "pay on behalf" language. 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 called an insurance 'policy'. Generally an insurance contract includes at a minimum the following elements: the 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 "" against the loss events 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 costs. So long as an insurer maintains adequate funds set aside for anticipated losses (i e. reserves) the remaining margin is an insurer's.[] When is a policy really insurance?“Insurance provides indemnification against loss or liability from specified events and circumstances that may occur or be discovered during a specified period.”— Statement of Financial Accounting Standards No. 113. "Accounting for Reinsurance of Short-Duration and Long-Duration Contracts" December 1992An operational definition of insurance is that it isthe benefit provided by a particular kind of indemnity contract called an insurance policy;that is issued by one of several kinds of legal entities ( or for example) any of which may be called an insurer;in which the insurer promises to pay on behalf of or to indemnify another party called a policyholder or insured;that protects the insured against loss caused by those perils subject to the indemnity in exchange for consideration known as an insurance premium. In recent years this kind of operational definition proved inadequate as a result of contracts that had the form but not the substance of insurance. The essence of insurance is the transfer of risk from the insured to one or more insurers. How much risk a contract actually transfers proved to be at the heart of the controversy. This issue arose most clearly in reinsurance where the use of to reengineer insurer balance sheets under became fashionable during the 1980s. The accounting profession raised serious concerns about the use of reinsurance in which little if any actual risk was transferred and went on to address the issue in FAS 113 cited above. While on its face. FAS 113 is limited to accounting for reinsurance transactions the guidance it contains is generally conceded to be equally applicable to US GAAP accounting for insurance transactions executed by commercial enterprises.[] Does the contract contain adequate risk transfer?FAS 113 contains two tests called the '9a and 9b tests,' that collectively require that a contract create a reasonable chance of a significant loss to the underwriter for it to be considered insurance.9. Indemnification of the ceding enterprise against loss or liability relating to insurance risk in reinsurance of short-duration contracts requires both of the following unless the condition in paragraph 11 is met:a. The reinsurer assumes significant insurance risk under the reinsured portions of the underlying insurance contracts b. It is reasonably possible that the reinsurer may realize a significant loss from the transaction. Paragraph 10 of FAS 113 makes clear that the 9a and 9b tests are based on comparing the of all costs to the PV of all income streams. FAS gives no guidance on the choice of a on which to base such a calculation other than to say that all outcomes tested should use the same rate. Statement of Statutory Accounting Principles ("SSAP") 62 issued by the applies to so-called 'statutory accounting' - the accounting for insurance enterprises to conform with regulation. Paragraph 12 of SSAP 62 is nearly identical to the FAS 113 test while paragraph 14 which is otherwise very similar to paragraph 10 of FAS 113 additionally contains a justification for the use of a single fixed rate for discounting purposes. The choice of an "reasonable and appropriate" discount rate is left as a matter of judgment.[] Is there a brightline test?Neither FAS 113 nor SAP 62 defines the terms reasonable or significant. Ideally one would like to be able to substitute values for both terms. It would be much simpler if one could apply a test of an X percent chance of a loss of Y percent or greater. Such tests have been proposed including one famously attributed to an SEC official who is said to have opined in an after lunch talk that a 10 percent chance of a 10 percent loss was sufficient to establish both reasonableness and significance. Indeed many insurers and reinsurers still apply this 10/10" test as a benchmark for risk transfer testing. It should be obvious that an attempt to use any numerical rule such as the 10/10 test will quickly run into problems. Implicit in the test is keeping the 10/10 that either are upper bonds for the comment made by the SEC official therefore the rest of this paragraph doesn't apply. Suppose a contract has a 1 percent chance of a 10,000 percent loss? It should be reasonably self-evident that such a contract is insurance but it fails one half of the 10/10 test. It does not appear that any brightline test of reasonableness nor significance can be constructed. Excess of loss contracts like those commonly used for umbrella and general liability insurance or to insure against property losses will typically have a low ratio of premium paid to maximum loss recoverable. This ratio (expressed as a percentage) commonly called the rate on line for historical reasons related to underwriting practices at Lloyd's of London will typically be low for contracts that contain reasonably self-evident risk transfer. As the ratio increases to approximate the present value of the limit of coverage self-evidence decreases and disappears. Contracts with low rates on line may survive modest features that limit the amount of risk transferred. As rates on line increase such risk limiting features become increasingly important.[] "Safe harbor" exemptionsThe analysis of reasonableness and significance is an estimate of the probability of different gain or loss outcomes under different loss scenarios. It takes time and resources to perform the analysis which constitutes a burden without value where risk transfer is reasonably self-evident. Guidance exists for insurers and reinsurers whose CEO's and CFO's attest annually as to the reinsurance agreements their firms undertake. The American Academy of Actuaries for instance identifies three categories of contract as outside the requirement of attestation:Inactive contracts. If there are no premiums due nor losses payable and the insurer is not taking any credit for the reinsurance determining risk transfer is irrelevant. Pre-1994 contracts. The attestation requirement only applies to contracts that were entered into renewed or amended on or after 1 January 1994. Prior contracts need not be analyzed. Where risk transfer is "reasonably self-evident.""Risk transfer is reasonably self-evident in most traditional per-risk or per-occurrence excess of loss reinsurance contracts. For these contracts a predetermined amount of premium is paid and the reinsurer assumes nearly all or all of the potential variability in the underlying losses and it is evident from reading the basic terms of the contract that the reinsurer can incur a significant loss. In many cases there is no aggregate limit on the reinsurer's loss. The existence of certain experience-based contract terms such as experience accounts profit commissions and additional premiums generally reduce the amount of risk transfer and make it less likely that risk transfer is reasonably self-evident."- "Reinsurance Attestation Supplement 20-1: Risk Transfer Testing Practice Note," American Academy of Actuaries. November 2005. ...[] Risk limiting featuresAn insurance policy should not contain provisions that allow one side or the other to unilaterally void the contract in exchange for benefit. Provisions that void the contract for failure to perform or for fraud or material misrepresentation are ordinary and acceptable. The policy should have a term of not more than about three years. This is not a hard and fast rule. Contracts of over five years duration are classified as ‘long-term,’ which can impact the accounting treatment and can obviously introduce the possibility that over the entire term of the contract no actual risk will transfer. The coverage provided by the contract need not cease at the end of the term (e g. the contract can cover occurrences as opposed to claims made or claims paid). The contract should be considered to include any other agreements written or oral that confer rights create obligations or create benefits on the part of either or both parties. Ideally the contract should contain an ‘Entire Agreement’ clause that assures there are no undisclosed written or oral side agreements that confer rights create obligations or create benefits on the part of either or both parties. If such rights obligations or benefits exist they must be factored into the tests of reasonableness and significance. The contract should not contain arbitrary limitations on timing of payments. Provisions that assure both parties of time to properly present and consider claims are acceptable provided they are commercially reasonable and customary. Provisions that expressly create actual or notional accounts that accrue actual or notional interest suggest that the contract contains in fact a deposit. Provisions for additional or return premium do not in and of themselves render a contract something other than insurance. However it should be unlikely that either a return or additional premium provision be triggered and neither party should have discretion regarding the timing of such triggering. All of the events that would give rise to claims under the contract cannot have materialized prior to the inception of the contract. If this "all events" test is not met then the contract is considered to be a retroactive contract for which the accounting treatment becomes complex.[] Insurer’s business modelProfit = + investment income - incurred loss - underwriting expenses. Insurers make money in two ways: (1) through the process by which insurers select the risks to insure and decide how much in premiums to charge for accepting those risks and (2) by investing the premiums they collect from insureds. The most difficult aspect of the insurance business is the of policies. Using a wide assortment of data insurers predict the likelihood that a claim will be made against their policies and price products accordingly. To this end insurers use to quantify the risks they are willing to assume and the premium they will charge to assume them. Data is analyzed to fairly accurately project the rate of future claims based on a given risk. Actuarial science uses and to analyze the risks associated with the range of perils covered and these scientific principles are used to determine an insurer's overall exposure. Upon termination of a given policy the amount of premium collected and the investment gains thereon minus the amount paid out in claims is the insurer's on that policy. Of course from the insurer's perspective some policies are winners (i e. the insurer pays out less in claims and expenses than it receives in premiums and investment income) and some are losers (i e. the insurer pays out more in claims and expenses than it receives in premiums and investment income). An insurer's underwriting performance is measured in its combined ratio. The loss ratio (incurred losses and loss-adjustment expenses divided by net earned premium) is added to the expense ratio (underwriting expenses divided by net premium written) to determine the company's combined ratio. The combined ratio is a reflection of the company's overall profitability. A combined ratio of less than 100 percent indicates profitability while anything over 100 indicates a loss. Insurance companies also earn profits on “float”. “Float” or available reserve is the amount of money at hand at any given moment that an insurer has collected in insurance premiums but has not been paid out in claims. Insurers start investing insurance premiums as soon as they are collected and continue to earn interest on them until claims are paid out. In the the underwriting loss of and 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 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. 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. Property and casualty insurers currently make the most money from their auto insurance line of business. Generally better statistics are available on auto losses and underwriting on this line of business has benefited greatly from advances in computing. Additionally property losses in the due to natural catastrophes have exacerbated this trend. Finally claims and loss handling is the materialized utility of insurance. 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 are a major business risk that must be managed and overcome.[] Gambling analogyBoth gambling and insurance transfer risk and reward. Gambling transactions offer the possibility of either a loss or a gain. Gambling creates losers and winners. Insurance transactions do not present the possibility of gain. Insurance offers financial support sufficient to replace loss not to create pure gain. Gamblers can continue spending buying more risk than they can afford to pay for. Insurance buyers can only spend up to the limit of what carriers would accept to insure; their loss is limited to the amount of the premium. Gamblers by creating new risk transfer are risk seekers. Insurance buyers are risk avoiders creating risk transfer in terms of their need to reduce exposure to large losses. Gambling or gaming is designed at the start so that the odds are not affected by the players' conduct or behavior and not required to conduct risk mitigation practices. But players can prepare and increase their odds of winning in certain games such as poker or blackjack. In contrast to gambling or gaming to obtain certain types of insurance such as fire insurance policyholders can be required to conduct risk mitigation practices such as installing and using fireproof building materials to reduce the odds of loss to fire. In addition after a proven loss insurers specialize in providing rehabilitation to minimize the total loss. Insurance the avoiding mitigating and transferring of risk creates greater predictability for individuals and organizations.[] History of insuranceIn some sense we can say that insurance appears simultaneously with the appearance of human society. We know of two types of economies in human societies: money economies (with markets money financial instruments and so on) and non-money or natural economies (without money markets financial instruments and so on). The second type is a more ancient form than the first. In such an economy and community we can see insurance in the form of people helping each other. For example if a house burns down the members of the community help build a new one. Should the same thing happen to one's neighbour the other neighbours must help. Otherwise neighbours will not receive help in the future. This type of insurance has survived to the present day in some countries where modern money economy with its financial instruments is not widespread (for example countries in the territory of the former Soviet Union). Turning to insurance in the modern sense (i e. insurance in a modern money economy in which insurance is part of the financial sphere) early methods of transferring or distributing risk were practiced by and traders as long ago as the and 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 c. 1750 BC and practiced by early sailing. 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. Achaemenian monarchs were the first to insure their people and made it official by registering the insuring process in governmental notary offices. The insurance tradition was performed each year in Norouz (beginning of the Iranian New Year); the heads of different ethnic groups as well as others willing to take part presented gifts to the monarch. The most important gift was presented during a special ceremony. When a gift was worth more than 10,000 Derrik (Achaemenian gold coin) the issue was registered in a special office. This was advantageous to those who presented such special gifts. For others the presents were fairly assessed by the confidants of the court. Then the assessment was registered in special offices. The purpose of registering was that whenever the person who presented the gift registered by the court was in trouble the monarch and the court would help him. Jahez a historian and writer writes in one of his books on ancient Iran: "[W]henever the owner of the present is in trouble or wants to construct a building set up a feast have his children married etc the one in charge of this in the court would check the registration. If the registered amount exceeded 10,000 Derrik he or she would receive an amount of twice as much."A thousand years later the inhabitants of invented the concept of the ''. Merchants whose goods were being shipped together would pay a proportionally divided premium which would be used to reimburse any merchant whose goods were jettisoned during storm or sinkage. The and introduced the origins of health and life insurance c. 600 AD when they organized guilds called "benevolent societies" which cared for the and paid expenses of members upon in the served a similar purpose. The deals with several aspects of insuring. Before insurance was established in the late 17th century. "friendly societies" existed in England in which people donated amounts of money to a general sum that could be used for emergencies. Separate insurance contracts (i e. insurance policies not bundled with loans or other kinds of contracts) were invented in in the 14th century as were insurance pools backed by pledges of landed estates. These new insurance contracts allowed insurance to be separated from investment a separation of roles that first proved useful in marine insurance. Insurance became far more sophisticated in post- and specialized varieties developed. Toward the end of the seventeenth century. London's growing importance as a centre for trade increased demand for marine insurance. In the late 1680s. Mr. Edward Lloyd opened a coffee house that became a popular haunt of ship owners merchants and ships’ captains and thereby a reliable source of the latest shipping news. It became the meeting place for parties wishing to insure cargoes and ships and those willing to underwrite such ventures. Today remains the leading market (note that it is not an insurance company) for marine and other specialist types of insurance but it works rather differently than the more familiar kinds of insurance. Insurance as we know it today can be traced to the which in 1666 devoured 13,200 houses. In the aftermath of this disaster opened an office to insure buildings. In 1680 he established England's first fire insurance company. "The Fire Office," to insure brick and frame homes. The first insurance company in the underwrote fire insurance and was formed in Charles Town (modern-day ) in 1732 helped to popularize and make standard the practice of insurance particularly against in the form of. In 1752 he founded the. Franklin's company was the first to make contributions toward fire prevention. Not only did his company warn against certain fire hazards it refused to insure certain buildings where the risk of fire was too great such as all wooden houses. In the United States of the insurance industry is highly with primary responsibility assumed by individual insurance departments. Whereas insurance markets have become centralized nationally and internationally state insurance commissioners operate individually though at times in concert through a. In recent years some have called for a dual state and federal regulatory system for insurance similar to that which oversees state banks and national banks. In the state of which has unique laws in keeping with its stature as a global business centre former New York Attorney General was in a unique position to grapple with major national insurance brokerages. Spitzer alleged that steered business to insurance carriers based on the amount of contingent commissions that could be extracted from carriers rather than basing decisions on whether carriers had the best deals for clients. Several of the largest commercial insurance brokerages have since stopped accepting contingent commissions and have adopted new business models.[] Types of insuranceAny risk that can be quantified can potentially be insured. Specific kinds of risk that may give rise to claims are known as "". An insurance policy will set out in detail which perils are covered by the policy and which are not. Below is a (non-exhaustive) list of the many different types of insurance that exist. A single policy may cover risks in one or more of the categories set forth below. For example auto insurance would typically cover both property risk (covering the risk of theft or damage to the car) and liability risk (covering legal claims from causing an accident). A 's insurance policy in the U. S typically includes property insurance covering damage to the home and the owner's belongings liability insurance covering certain legal claims against the owner and even a small amount of health insurance for medical expenses of guests who are injured on the owner's property. known in the as motor insurance is probably the most common form of insurance and may cover both legal claims against the and loss of or damage to the insured's itself. Throughout most of the an auto insurance policy is required to legally operate a motor vehicle on public roads. In some jurisdictions bodily injury compensation for automobile accident victims has been changed to a system which reduces or eliminates the ability to sue for compensation but provides automatic eligibility for benefits. Credit card companies insure against on rented cars insures against hull spares deductible hull war and liability risks. (also known as boiler and machinery insurance or equipment breakdown insurance) insures against accidental physical damage to equipment or machinery 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 due to any cause (including the negligence of the insured) not otherwise expressly excluded can be any kind of insurance that protects businesses against risks. Some principal subtypes of business insurance are (a) the various kinds of professional liability insurance also called professional indemnity insurance which are discussed below under that name; and (b) the business owners policy (BOP) which bundles into one policy many of the kinds of coverage that a business owner needs in a way analogous to how homeowners insurance bundles the coverages that a homeowner needs insures against accidents not necessarily tied to any specific property repays some or all of a back when certain things happen to the borrower such as or. Mortgage insurance (which see below) 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 insures 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. "Farmers use crop insurance 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 for instance." or insurance provides coverage for civilian workers hired by the government to perform contracts outside the US and Canada. DBA is required for all US citizens. US residents. US 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 protects an organization (usually a corporation) from costs associated with litigation resulting from mistakes incurred by directors and officers for which they are liable. In the industry it is usually called "D&O" for short policies provide financial support in the event the policyholder is unable to work because of disabling illness or injury. It provides monthly support to help pay such obligations as mortgages and credit cards 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. Errors and omissions insurance: See "Professional liability insurance" under "Liability insurance" provides individuals and organizations operating outside of their home country with protection for automobiles property health liability and business pursuits protects individuals and companies against various financial risks. For example a might purchase cover to protect it from loss of if a fire in a prevented it from carrying out its business for a time. Insurance might also cover the failure of a to pay it owes to the insured. This type of insurance is frequently referred to as "business interruption insurance." and are included in this category although these products provide a benefit to a third party (the "obligee") in the event the insured party (usually referred to as the "obligor") fails to perform its obligations under a contract with the obligee. Fire insurance: See "Property insurance". Hazard insurance: See "Property insurance" policies will often cover the cost of private medical treatments if the National Health Service in the UK (NHS) or other publicly-funded health programs do not pay for them. It will often result in quicker health care where better facilities are available. Home insurance or homeowners insurance: See "Property 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 willful or intentional acts by the insured protects the insured from bodily injury property damage and cleanup costs as a result of the dispersal release or escape of pollutants. also called professional indemnity insurance protects professional practitioners such as architects lawyers doctors and accountants 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 malpractice insurance. Notaries public may take out errors and omissions insurance (E&O). Other potential E&O policyholders include for example real estate brokers home inspectors appraisers and website developers 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 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 provide a stream of payments and are generally classified as insurance because they are issued by insurance companies and regulated as insurance and require the same kinds of actuarial and investment management expertise that life insurance requires. Annuities and that pay a benefit for life are sometimes regarded as insurance against the possibility that a 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 is a little-known hybrid insurance policy jointly issued by governments and banks. It is used to protect public funds from tamper by unauthorized parties. In special cases a government may authorize its use in protecting semi-private funds which are liable to tamper. The terms of this type of insurance are usually very strict. Therefore it is used only in extreme cases where maximum security of funds is required and marine cargo insurance cover the loss or damage of ships at sea or on inland waterways and of the cargo that may be on them. 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 insures the lender against default by the borrower is the UK's version of social insurance (which see below) is a type of insurance policy (typically automobile insurance) where insureds are indemnified by their own insurer regardless of fault in the incident. Nuclear incident insurance covers damages resulting from an incident involving radioactive materials and is generally arranged at the national level. (For the United States see the.) insures pets against accidents and illnesses - some companies cover routine/wellness care and burial as well can be taken out by businesses with operations in in which there is a risk that or other conditions will result in a loss. Pollution Insurance. A first-party coverage for contamination of insured property either by external or on-site sources. Coverage 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 provides protection against risks to property such as fire or damage. This includes specialized forms of insurance such as inland marine insurance or 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 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 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 mandates 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. This is a large complicated topic that engenders tremendous debate which can be further studied in the following articles (and others):Surety Bond insurance is a three party insurance guaranteeing the performance of the principal provides protection against any loss or damage caused by activities provides a guarantee that title to is vested in the purchaser and/or free and clear of or encumbrances. It is usually issued in conjunction with a search of the public records performed at the time of a transaction is an insurance cover taken by those who travel abroad which covers certain losses such as medical expenses lost of personal belongings travel delay personal liabilities etc is an insurance that covers volcano damage in Hawaii insurance replaces all or part of a worker's lost and accompanying medical expense incurred because of a job-related injury.[] Types of insurance companiesInsurance companies may be classified asLife insurance companies which sell life insurance annuities and pensions products. Non-life or general insurance companies which sell other types of insurance. General insurance companies can be further divided into these sub categories. Standard LinesExcess LinesIn most countries life and non-life insurers are subject to different regulatory regimes and different and 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. By contrast non-life insurance cover usually covers a shorter period such as one year. In the United States standard line insurance companies are your "main stream" insurers. These are the companies that typically insure your auto home or business. They use pattern or "cookie-cutter" policies without variation from one person to the next. They usually have lower premiums than excess lines and can sell directly to individuals. They are regulated by state laws that can restrict the amount they can charge for insurance policies. Excess line insurance companies (aka Excess and Surplus) typically insure risks not covered by the standard lines market. They are broadly referred as being all insurance placed with non-admitted insurers. Non-admitted insurers are not licensed in the states where the risks are located. These companies have more flexibility and can react faster than standard insurance companies because they don't have the same regulations as standard insurance companies. State laws generally require insurance placed with surplus line agents and brokers to not be available through standard licensed insurers. Insurance companies are generally classified as either or stock companies. This is more of a traditional distinction as true mutual companies are becoming rare. Mutual companies are owned by the policyholders while stockholders (who may or may not own policies) own stock insurance companies. Other possible forms for an insurance company include reciprocals in which policyholders 'reciprocate' in sharing risks and Lloyds organizations. Insurance companies are rated by various agencies such as. 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 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 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 percent 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 products 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 and/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.[] Life insurance and savingCertain life insurance contracts accumulate 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 are financial instruments to accumulate or when it is needed. See. In many countries such as the U. S and the UK the 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 as well as protection in the event of early death. In U. S. 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. A combination of low-cost term life insurance and a higher-return tax-efficient retirement account may achieve better investment return.[] Size of global insurance industryLife insurance premia written in 2005Non-life insurance premia written in 2005Global insurance premiums grew by 9.7 percent in 2004 to reach $3.3 trillion. This follows 11.7 percent growth in the previous year. Life insurance premiums grew by 9.8 percent during the year thanks to rising demand for annuity and pension products. Non-life insurance premiums grew by 9.4 percent as premium rates increased. Over the past decade global insurance premiums rose by more than a half as annual growth fluctuated between 2 percent and 10 percent. []Advanced economies account for the bulk of global insurance. With premium income of $1,217 billion in 2004. North America was the most important region followed by the EU (at $1,198 billion) and Japan (at $492 billion). The top four countries accounted for nearly two-thirds of premiums in 2004. The United States and Japan alone accounted for a half of world insurance premiums much higher than their 7 percent share of the global population. Emerging markets accounted for over 85 percent of the world’s population but generated only 10 percent of premiums. The volume of UK insurance business totaled $295 billion in 2004 or 9.1 percent of global premiums. [] Financial viability of insurance companiesFinancial stability and strength of an insurance company should be a major consideration when purchasing 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 such as and provide information and rate the financial viability of insurance companies.[] Controversies[] Insurance insulates too muchBy creating a "security blanket" for its insureds 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). This problem is known to the insurance industry as. 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 committed by the insured. Even if a provider were so irrational as to desire 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.[] Closed community self-insuranceSome 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 groups including the and some Muslim groups depend on support provided by their when 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 of explicit insurance contracts. In the (which for practical purposes meant the ) 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.[] Complexity of insurance policy contractsInsurance 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 and sold. Many institutional insurance purchasers buy insurance through an insurance broker. Brokers represent the buyer (not the insurance company) and typically counsel the buyer on appropriate coverages policy limitations. A broker generally holds contracts with many insurers thereby allowing the broker to "shop" the for the best rates and coverage possible. Insurance may also be purchased through an agent. Unlike a broker who represents the policyholder an agent represents the insurance company from whom the policyholder buys. An agent can represent more than one company.[] Redlining is the practice of denying insurance coverage in specific geographic areas purportedly because of a high likelihood of loss while the alleged motivation is unlawful discrimination or 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 determining premiums and premium rate structures insurers consider quantifiable factors including location and level. However the use of such factors is often considered to be unfair or unlawfully 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. 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 than 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. What is often missing from the debate is that prohibiting the use of legitimate actuarially sound factors means that an insufficient amount is being charged for a given risk and there is thus a deficit in the system. The failure to address the deficit may mean insolvency and hardship for all of a company's insureds. The options for addressing the deficit seem to be the following: Charge the deficit to the other policyholders or charge it to the government (i e. externalize outside of the company to society at large).[] Health insuranceHealth insurance which is coverage for individuals to protect them against medical costs is a highly charged and political issue in the United States which does not have socialized health coverage. In theory the market for health insurance should function in a manner similar to other insurance coverages but the skyrocketing cost of health coverage has disrupted markets around the globe but perhaps most glaringly in the U. S. See.[] Dental insuranceDental insurance like health insurance is coverage for individuals to protect them against dental costs. In the U. S. dental insurance is often part of an employer's benefits package along with health insurance.[] Insurance patentsSee for more details. New insurance products can now be protected from copying with a in the. A recent example of a new insurance product that is patented is telematic. It was independently invented and patented by a major U. S auto insurance company. () and a Spanish independent inventor. Salvador Minguijon Perez (). The basic idea of telematic auto insurance is that a driver's behavior is monitored directly while he or she drives and the information is transmitted to the insurance company. The insurance company uses the information to assess the likelihood that a driver will have an accident and adjusts premiums accordingly. A driver who drives great distances at high speeds for example might be charged a different rate than a driver who drives short distances at low speeds. The precise effect on charges is not known as it is not clear that a high speed long distance driver incurs greater risk to an insurance pool than the slow around-town driver.[]A British auto insurance company has obtained a license to both the Progressive patent and Perez patent. They have made investments in infrastructure and developed a commercial offering called "Pay As You Drive" or PAYD. Recent theoretical economic research on the social welfare effects of Progressive's telematics technology business process patents have questioned whether the business process patents are pareto efficient for society. Premliminary results suggest that they are not but more work is needed. 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 percent 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 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 issued has steadily risen from 15 in 2002 to 44 in 2006. [] The insurance industry and rent seekingCertain insurance products and practices have been described as 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 events. Under United States tax law for example most owners of and 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. Another example is the legal infrastructure which allows life insurance to be held in an irrevocable trust which is used to pay an while the proceeds themselves are immune from the estate tax.[] Criticism of insurance companiesSome people believe that modern insurance companies are money-making businesses which have little interest in insurance. They argue that the purpose of insurance is to spread risk so the reluctance of insurance companies to take on high-risk cases (e g houses in areas subject to flooding or young drivers) runs counter to the principle of insurance. Other criticisms include:Insurance policies contain too many. For example some house insurance policies do not cover damage to garden walls. Most insurance companies now use and staff attempt to answer questions by reading from a script. It is difficult to speak to anybody with expert knowledge.[] Glossary'Combined ratio' = loss ratio + expense ratio. Loss ratio is calculated by dividing the amount of losses (sometimes including loss adjustment expenses) by the amount of earned premium. Expense ratio is calculated by dividing the amount of operational expenses by the amount of earned premium. A lower number indicates a better return on the amount of capital placed at risk by an insurer.'URIE' = unincorporated reciprocal inter-insurance exchange.'SSA' = subscriber savings account.'AIF' = attorney in fact.[] References This discussion is adapted from Mehr and Camack “Principles of Insurance”. 6th edition. 1976 pp 34 – 37. Insurance Information Institute. C. Kulp & J. Hall. Casualty Insurance. Fourth Edition. 1968 page 35 However bankruptcy of the insured does not relieve the insurer. Certain types of insurance e g. workers's compensation and personal automobile are subject to statutory requirements that injured parties have direct access to coverage. Ibid page 35 Ibid page 35 Fitzpatrick. Sean. 10 Conn. Ins. L. J. 255 (2004). Retrieved on -. “Method for providing crop insurance for a crop associated with a defined attribute” Gregory D. Squires (2003) Racial Profiling. Insurance Style: Insurance Redlining and the Uneven Development of Metropolitan Areas Journal of Urban Affairs Volume 25 Issue 4 Page 391-410. November 2003 (HTML). (HTML). [] See also (broader industry to which insurance belongs) (the International Association for the Study of Insurance Economics)[] Lists[] External linksLook up in the free dictionary. - finding information on the insurance industry (UK bias) - displays thousands of antique insurance policies and ephemera at the Retrieved from "":
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