NATURE AND MEANING OF INSURANCE.
NATURE AND MEANING OF INSURANCE
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 aninsurable 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.
OLD METHODS OF INSURANCE
Methods for transferring or distributing risk were practiced by Chinese and Babylonian traders as long ago as the3rd 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 earlyMediterranean 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 Genoa in the 14th century, as were insurance pools
backed by pledges of landed estates. The first known insurance contract dates
from Genoa in 1347, and in the next century maritime
insurance developed widely and premiums were intuitively varied with risks.[3] These new insurance contracts allowed
insurance to be separated from investment, a separation of roles that first
proved useful in marine insurance.
Modern insurance
Insurance became far more sophisticated in Enlightenment era Europe,
and specialized varieties developed.
Lloyd's
Coffee House was the first marine
insurance company.
Property
insurance as we know it today
can be traced to the Great
Fire of London, which in 1666 devoured more than 13,000 houses. The
devastating effects of the fire converted the development of insurance
"from a matter of convenience into one of urgency, a change of opinion
reflected in Sir Christopher Wren's
inclusion of a site for 'the Insurance Office' in his new plan for London in
1667". A number of attempted fire insurance schemes
came to nothing, but in 1681, economist Nicholas Barbon and eleven associates established the first
fire insurance company, the "Insurance Office for Houses", at the
back of the Royal Exchange to insure brick and frame homes. Initially, 5,000
homes were insured by his Insurance Office.
At the same time, the first insurance schemes for the underwriting of business
ventures became available. By
the end of the seventeenth century, London's growing importance as a center for
trade was increasing demand for marine insurance. In
the late 1680s, Edward Lloyd opened a
coffee house, which became the meeting place for parties in the
shipping industry wishing to insure cargoes and ships, and those willing to
underwrite such ventures. These informal beginnings led to the establishment of
the insurance market Lloyd's
of London and several related
shipping and insurance businesses.
The first life insurance policies were taken out in the early 18th
century. The first company to offer life insurance was the Amicable Society for a
Perpetual Assurance Office, founded in London in 1706 by William Talbot and Sir Thomas Allen. Edward Rowe Mores established theSociety for Equitable Assurances on Lives and
Survivorship in 1762.
It was the world's first mutual
insurer and it pioneered age
based premiums based onmortality
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. This operated much like modern disability
insuranceThe first company to offer accident insurance
was the Railway Passengers Assurance Company, formed in 1848 in England to insure
against the rising number of fatalities on the nascentrailway system.
By the late 19th century, governments began to initiate national
insurance programs against sickness and old age. Germany built on a tradition of welfare programs in
Prussia and Saxony that began as early as in the 1840s. In the 1880s Chancellor Otto von Bismarck introduced old age pensions, accident
insurance and medical care that formed the basis for Germany's welfare state. In Britain more extensive legislation was
introduced by the Liberalgovernment
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 modernwelfare
state
Principles OF INSURANCE
Insurance involves pooling funds from many insured entities (known as exposures) to pay
for the losses that some may incur. The insured entities are therefore protected
from risk for a fee, with the fee being dependent upon the frequency and
severity of the event occurring. In order to be an insurable risk, the
risk insured against must meet certain characteristics. Insurance as afinancial intermediary is a commercial enterprise and a major part of the financial
services industry, but individual entities can also self-insure through saving money for possible future
losses.
Insurability
Risk which can be insured by private companies typically shares
seven common characteristics:
1.
Large
number of similar exposure units: Since insurance operates through pooling resources, the
majority of insurance policies are provided for individual members of large
classes, allowing insurers to benefit from the law
of large numbers in which predicted
losses are similar to the actual losses. Exceptions include Lloyd's
of London, which is famous for insuring the life or health of
actors, sports figures, and other famous individuals. However, all exposures
will have particular differences, which may lead to different premium rates.
2.
Definite
loss: The loss takes place
at a known time, in a known place, and from a known cause. The classic example
is death of an insured person on a life insurance policy. Fire, automobile accidents,
and worker injuries may all easily meet this criterion. Other types of losses
may only be definite in theory. Occupational
disease, for instance, may involve prolonged exposure to injurious
conditions where no specific time, place, or cause is identifiable. Ideally,
the time, place, and cause of a loss should be clear enough that a reasonable
person, with sufficient information, could objectively verify all three
elements.
3.
Accidental
loss: The event that
constitutes the trigger of a claim should be fortuitous, or at least outside
the control of the beneficiary of the insurance. The loss should be pure, in
the sense that it results from an event for which there is only the opportunity
for cost. Events that contain speculative elements such as ordinary business
risks or even purchasing a lottery ticket are generally not considered
insurable.
4.
Large
loss: The size of the loss
must be meaningful from the perspective of the insured. Insurance premiums need
to cover both the expected cost of losses, plus the cost of issuing and administering
the policy, adjusting losses, and supplying the capital needed to reasonably
assure that the insurer will be able to pay claims. For small losses, these
latter costs may be several times the size of the expected cost of losses.
There is hardly any point in paying such costs unless the protection offered
has real value to a buyer.
5.
Affordable
premium: If the likelihood of
an insured event is so high, or the cost of the event so large, that the
resulting premium is large relative to the amount of protection offered, then
it is not likely that the insurance will be purchased, even if on offer.
Furthermore, as the accounting profession formally recognizes in financial
accounting standards, the premium cannot be so large that there is not a
reasonable chance of a significant loss to the insurer. If there is no such
chance of loss, then the transaction may have the form of insurance, but not
the substance (see the U.S. Financial Accounting Standards Board pronouncement number 113: "Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration Contracts").
6.
Calculable
loss: There are two
elements that must be at least estimable, if not formally calculable: the
probability of loss, and the attendant cost. Probability of loss is generally
an empirical exercise, while cost has more to do with the ability of a
reasonable person in possession of a copy of the insurance policy and a proof
of loss associated with a claim presented under that policy to make a
reasonably definite and objective evaluation of the amount of the loss
recoverable as a result of the claim.
7.
Limited
risk of catastrophically large losses: Insurable losses are ideally independent and non-catastrophic, meaning that the losses do not happen all
at once and individual losses are not severe enough to bankrupt the insurer;
insurers may prefer to limit their exposure to a loss from a single event to
some small portion of their capital base. Capitalconstrains
insurers' ability to sell earthquake
insurance as well as wind
insurance in hurricane zones. In the United States, flood risk is insured by the federal government. In
commercial fire insurance, it is possible to find single properties whose total
exposed value is well in excess of any individual insurer's capital constraint.
Such properties are generally shared among several insurers, or are insured by
a single insurer who syndicates the risk into the reinsurance market.
Legal
When a company insures an individual entity, there are basic
legal requirements and regulations. Several commonly cited legal principles of
insurance include:
1.
Indemnity – the insurance company indemnifies, or
compensates, the insured in the case of certain losses only up to the insured's
interest.
2.
Benefit insurance – as
it is stated in the study books of The Chartered Insurance Institute, the
insurance company doesn't have the right of recovery from the party who caused
the injury and is to compensate the Insured regardless of the fact that Insured
had already sued the negligent party for the damages (for example, personal
accident insurance)
3.
Insurable
interest – the insured
typically must directly suffer from the loss. Insurable interest must exist
whether property insurance or insurance on a person is involved. The concept
requires that the insured have a "stake" in the loss or damage to the
life or property insured. What that "stake" is will be determined by
the kind of insurance involved and the nature of the property ownership or
relationship between the persons. The requirement of an insurable interest is
what distinguishes insurance from gambling.
4.
Utmost good faith – (Uberrima fides) the
insured and the insurer are bound by a good
faith bond of honesty and
fairness. Material facts must be disclosed.
5.
Contribution –
insurers which have similar obligations to the insured contribute in the
indemnification, according to some method.
6.
Subrogation – the
insurance company acquires legal rights to pursue recoveries on behalf of the
insured; for example, the insurer may sue those liable for the insured's loss.
The Insurers can waive their subrogation rights by using the special clauses.
7.
Causa proxima, or proximate cause – the cause of loss (the peril) must be
covered under the insuring agreement of the policy, and the dominant cause must
not be excluded
8.
Mitigation – In case
of any loss or casualty, the asset owner must attempt to keep loss to a
minimum, as if the asset was not insured.
Indemnification
To "indemnify" means to make whole again, or to be
reinstated to the position that one was in, to the extent possible, prior to
the happening of a specified event or peril. Accordingly, life insurance is generally not considered to be indemnity
insurance, but rather "contingent" insurance (i.e., a claim arises on
the occurrence of a specified event). There are generally three types of
insurance contracts that seek to indemnify an insured:
1.
A
"reimbursement" policy
2.
A "pay on
behalf" or "on behalf of policy"
3.
An
"indemnification" policy
From an insured's standpoint, the result is usually the same:
the insurer pays the loss and claims expenses.
If the Insured has a "reimbursement" policy, the
insured can be required to pay for a loss and then be "reimbursed" by
the insurance carrier for the loss and out of pocket costs including, with the
permission of the insurer, claim expenses.
Under a "pay on behalf" policy, the insurance carrier
would defend and pay a claim on behalf of the insured who would not be out of
pocket for anything. Most modern liability insurance is written on the basis of
"pay on behalf" language which enables the insurance carrier to
manage and control the claim.
Under an "indemnification" policy, the insurance
carrier can generally either "reimburse" or "pay on behalf
of", whichever is more beneficial to it and the insured in the claim
handling process.
An entity seeking to transfer risk (an individual, corporation,
or association of any type, etc.) becomes the 'insured' party once risk is
assumed by an 'insurer', the insuring party, by means of a contract, called an insurance policy.
Generally, an insurance contract includes, at a minimum, the following
elements: identification of participating parties (the insurer, the insured,
the beneficiaries), the premium, the period of coverage, the particular loss
event covered, the amount of coverage (i.e., the amount to be paid to the
insured or beneficiary in the event of a loss), and exclusions (events not covered). An insured is thus said
to be "indemnified"
against the loss covered in the policy.
When insured parties experience a loss for a specified peril,
the coverage entitles the policyholder to make a claim against the insurer for
the covered amount of loss as specified by the policy. The fee paid by the
insured to the insurer for assuming the risk is called the premium. Insurance
premiums from many insureds are used to fund accounts reserved for later
payment of claims – in theory for a relatively few claimants – and for overhead costs. So long as an insurer maintains
adequate funds set aside for anticipated losses (called reserves), the
remaining margin is an insurer's profit.
Social effects
Insurance can have various effects on society through the way
that it changes who bears the cost of losses and damage. On one hand it can
increase fraud; on the other it can help societies and individuals prepare for
catastrophes and mitigate the effects of catastrophes on both households and
societies.
Insurance can influence the probability of losses through moral hazard,insurance fraud, and
preventive steps by the insurance company. Insurance scholars have typically
used moral hazard to refer to the increased loss due to
unintentional carelessness and insurance fraud to refer to increased risk due
to intentional carelessness or indifference. Insurers attempt to address carelessness
through inspections, policy provisions requiring certain types of maintenance,
and possible discounts for loss mitigation efforts. While in theory insurers
could encourage investment in loss reduction, some commentators have argued that
in practice insurers had historically not aggressively pursued loss control
measures—particularly to prevent disaster losses such as hurricanes—because of
concerns over rate reductions and legal battles. However, since about 1996
insurers have begun to take a more active role in loss mitigation, such as
through building codes.
Methods of insurance
In accordance with study books of The Chartered Insurance
Institute, there are the following types of insurance:
1.
Co-insurance – risks
shared between insurers
2.
Dual insurance – risks
having two or more policies with same coverage
3.
Self-insurance –
situations where risk is not transferred to insurance companies and solely
retained by the entities or individuals themselves
4.
Reinsurance –
situations when Insurer passes some part of or all risks to another Insurer
called Reinsurer
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 scienceof
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 andseverity 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.[23] 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.[24] A combined ratio of less than 100% indicates
an underwriting profit, while anything over 100 indicates an underwriting loss.
A company with a combined ratio over 100% may nevertheless remain profitable
due to investment earnings.
Insurance companies earn investment profits on "float". Float, or
available reserve, is the amount of money on hand at any given moment that an
insurer has collected in insurance premiums but has not paid out in claims.
Insurers start investing insurance premiums as soon as they are collected and
continue to earn interest or other income on them until claims are paid out.
TheAssociation of British Insurers (gathering 400 insurance companies and 94% of
UK insurance services) has almost 20% of the investments in the London Stock Exchange.
In the United States, the
underwriting loss of property and casualty
insurancecompanies was $142.3 billion in the five years ending 2003.
But overall profit for the same period was $68.4 billion, as the result of
float. Some insurance industry insiders, most notably Hank
Greenberg, do not believe that it is forever possible to sustain a
profit from float without an underwriting profit as well, but this opinion is
not universally held.
Naturally, the float method is difficult to carry out in an economically depressedperiod. 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
Claims and loss handling is the materialized utility of
insurance; it is the actual "product" paid for. Claims may be filed
by insureds directly with the insurer or through brokers
or agents. The insurer may require that the claim be filed on its
own proprietary forms, or may accept claims on a standard industry form, such
as those produced by ACORD.
Insurance company claims departments employ a large number of claims adjusters supported by a staff of records
management and data entry clerks.
Incoming claims are classified based on severity and are assigned to adjusters
whose settlement authority varies with their knowledge and experience. The
adjuster undertakes an investigation of each claim, usually in close
cooperation with the insured, determines if coverage is available under the
terms of the insurance contract, and if so, the reasonable monetary value of
the claim, and authorizes payment.
The policyholder may hire their own public adjuster to negotiate the settlement with the insurance
company on their behalf. For policies that are complicated, where claims may be
complex, the insured may take out a separate insurance policy add-on, called
loss recovery insurance, which covers the cost of a public adjuster in the case
of a claim.
Adjusting liability insurance claims is particularly difficult
because there is a third party involved, the plaintiff,
who is under no contractual obligation to cooperate with the insurer and may in
fact regard the insurer as a deep pocket. The
adjuster must obtain legal counsel for the insured (either inside
"house" counsel or outside "panel" counsel), monitor
litigation that may take years to complete, and appear in person or over the
telephone with settlement authority at a mandatory settlement conference when
requested by the judge.
If a claims adjuster suspects under-insurance, the condition
of average may come into play to
limit the insurance company's exposure.
In managing the claims handling function, insurers seek to
balance the elements of customer satisfaction, administrative handling
expenses, and claims overpayment leakages. As part of this balancing act, fraudulent insurance practices are a major business risk that must be managed
and overcome. Disputes between insurers and insureds over the validity of
claims or claims handling practices occasionally escalate into litigation (see insurance
bad faith).
Marketing
Insurers will often use insurance
agents to initially market or
underwrite their customers. Agents can be captive, meaning they write only for
one company, or independent, meaning that they can issue policies from several
companies. The existence and success of companies using insurance agents is
likely due to improved and personalized service.
Types
Any risk that can be quantified can potentially be insured.
Specific kinds of risk that may give rise to claims are known as perils. An
insurance policy will set out in detail which perils are covered by the policy
and which are not. Below are non-exhaustive lists of the many different types
of insurance that exist. A single policy 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 anaccident). A home insurance policy in the United States typically includes
coverage for damage to the home and the owner's belongings, certain legal
claims against the owner, and even a small amount of coverage for medical
expenses of guests who are injured on the owner's property.
Business insurance can take a number of different
forms, such as the various kinds of professional liability insurance, also
called professional indemnity (PI), which are discussed below under that name;
and the business owner's policy(BOP), which packages into one
policy many of the kinds of coverage that a business owner needs, in a way
analogous to how homeowners' insurance packages the coverages that a homeowner
needs.
Auto insurance
Auto insurance protects the policyholder against financial loss
in the event of an incident involving a vehicle they own, such as in a traffic collision.
Coverage typically includes:
·
Property coverage, for
damage to or theft of the car
·
Liability coverage,
for the legal responsibility to others for bodily injury or property damage
·
Medical coverage, for
the cost of treating injuries, rehabilitation and sometimes lost wages and
funeral expenses
Gap insurance
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
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
·
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 asmortgage
loans and credit cards.
Short-term and long-term disability policies are available to individuals, but
considering the expense, long-term policies are generally obtained only by
those with at least six-figure incomes, such as doctors, lawyers, etc.
Short-term disability insurance covers a person for a period typically up to
six months, paying a stipend each month to cover medical bills and other
necessities.
·
Long-term disability
insurance covers an individual's expenses for the long term, up until such time
as they are considered permanently disabled and thereafter Insurance companies
will often try to encourage the person back into employment in preference to
and before declaring them unable to work at all and therefore totally disabled.
·
Disability overhead insurance allows business owners to cover the overhead
expenses of their business while they are unable to work.
·
Total permanent disability insurance provides benefits when a person is permanently
disabled and can no longer work in their profession, often taken as an adjunct
to life insurance.
·
Workers' compensation insurance replaces all or part of a worker's wageslost
and accompanying medical expenses incurred because of a job-related injury.
Casualty
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 orembezzlement.
·
Terrorism
insurance provides protection
against any loss or damage caused by terrorist activities. In the United States in the wake
of 9/11,
the Terrorism Risk Insurance Act 2002 (TRIA) set up a federal program providing
a transparent system of shared public and private compensation for insured
losses resulting from acts of terrorism. The program was extended until the end
of 2014 by the Terrorism Risk Insurance Program Reauthorization Act 2007
(TRIPRA).
·
Kidnap and ransom insurance is designed to protect individuals and
corporations operating in high-risk areas around the world against the perils
of kidnap, extortion, wrongful detention and hijacking.
·
Political risk insurance is a form of casualty insurance that can be
taken out by businesses with operations in countries in which there is a risk
thatrevolution or other political conditions could result in a loss.
Life
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 anannuity. In most states, a person cannot purchase a
policy on another person without their knowledge.
Annuities provide a stream of payments and are generally
classified as insurance because they are issued by insurance companies, are
regulated as insurance, and require the same kinds of actuarial and investment
management expertise that life insurance requires. Annuities and pensions that pay a benefit for life are sometimes
regarded as insurance against the possibility that a retiree will outlive his or her financial resources.
In that sense, they are the complement of life insurance and, from an
underwriting perspective, are the mirror image of life insurance.
Certain life insurance contracts accumulate cash values, which may be taken by the insured if
the policy is surrendered or which may be borrowed against. Some policies, such
as annuities and endowment policies,
are financial instruments to accumulate or liquidate wealth when it is needed.
In many countries, such as the United States and the UK, the tax law provides that the interest on this cash value
is not taxable under certain circumstances. This leads to widespread use of
life insurance as a tax-efficient method ofsaving as well as protection in the event of early
death.
In the United States, the tax on interest income on life
insurance policies and annuities is generally deferred. However, in some cases
the benefit derived from tax deferral may be offset by a low return. This depends
upon the insuring company, the type of policy and other variables (mortality,
market return, etc.). Moreover, other income tax saving vehicles (e.g., IRAs,
401(k) plans, Roth IRAs) may be better alternatives for value accumulation.
Burial insurance
Burial insurance is a very old type of life insurance which is
paid out upon death to cover final expenses, such as the cost of a funeral.
The Greeks and Romansintroduced
burial insurance c. 600 CE when they organized guilds called "benevolent societies" which
cared for the surviving families and paid funeral expenses of members upon
death. Guilds in the Middle Ages served a similar purpose, as did friendly
societies during Victorian times.
Property
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 insurancemay, like casualty insurance, be used as a broad
category of various subtypes of insurance, some of which are listed below
·
Aviation
insurance protects aircrafthulls 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 and/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.
·
Earthquake
insurance is a form of property
insurance that pays the policyholder in the event of an earthquake that causes damage to the property. Most
ordinary home insurance policies do not cover earthquake damage. Earthquake
insurance policies generally feature a high deductible.
Rates depend on location and hence the likelihood of an earthquake, as well as
the construction of the home.
·
Fidelity bond is a form of casualty insurance that covers
policyholders for losses incurred as a result of fraudulent acts by specified
individuals. It usually insures a business for losses caused by the dishonest
acts of its employees.
·
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 theNational Flood Insurance Programwhich 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 waterways, 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 printer
The demand for terrorism insurance surged
after 9/11
·
Volcano insurance is a
specialized insurance protecting against damage arising specifically from volcanic
eruptions.
·
Windstorm insurance is
an insurance covering the damage that can be caused by wind events such ashurricanes.
Liability
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.
·
Public liability insurance or general liability insurance
covers a business or organization against claims should its operations injure a
member of the public or damage their property in some way.
·
Directors and officers liability insurance (D&O) protects an organization (usually a
corporation) from costs associated with litigation resulting from errors made
by directors and officers for which they are liable.
·
Environmental
liability or environmental impairment insurance protects the insured from
bodily injury, property damage and cleanup costs as a result of the dispersal,
release or escape of pollutants.
·
Errors and omissions insurance (E&O) is business liability insurance for
professionals such as insurance agents, real estate agents and brokers,
architects, third-party administrators (TPAs) and other business professionals.
·
Prize indemnity insurance protects the insured from giving away a large
prize at a specific event. Examples would include offering prizes to
contestants who can make a half-court shot at a basketball game, or a hole-in-one at a golf tournament.
·
Professional liability insurance, also called professional indemnity insurance(PI), protects
insured professionals such as architectural corporations and medical
practitioners against potential negligence claims made by their
patients/clients. Professional liability insurance may take on different names
depending on the profession. For example, professional liability insurance in
reference to the medical profession may be called medical
malpracticeinsurance.
Often a commercial insured's liability insurance program
consists of several layers. The first layer of insurance generally consists of
primary insurance, which provides first dollar indemnity for judgments and
settlements up to the limits of liability of the primary policy. Generally,
primary insurance is subject to a deductible and obligates the insured to
defend the insured against lawsuits, which is normally accomplished by
assigning counsel to defend the insured. In many instances, a commercial insured
may elect to self-insure. Above the primary insurance or self-insured
retention, the insured may have one or more layers of excess insurance to
provide coverage additional limits of indemnity protection. There are a variety
of types of excess insurance, including "stand-alone" excess policies
(policies that contain their own terms, conditions, and exclusions),
"follow form" excess insurance (policies that follow the terms of the
underlying policy except as specifically provided), "umbrella"
insurance policies (excess insurance that in some circumstances could provide
coverage that is broader than the underlying insurance), and "surplus
lines" insurance (policies written by non-admitted carriers).
Credit
Credit insurance repays some or all of a loan when the borrower is insolvent.
·
Mortgage
insurance insures the lender
against default by the borrower. Mortgage insurance is a form of credit
insurance, although the name "credit insurance" more often is used to
refer to policies that cover other kinds of debt.
·
Many credit cards
offer payment protection plans which are a form of credit insurance.
·
Trade credit insurance is business insurance over the accounts receivable of the
insured. The policy pays the policy holder for covered accounts receivable if
the debtor defaults on payment.
·
Collateral protection insurance (CPI) insures property (primarily vehicles)
held as collateral for loans made by lending institutions.
Other types
·
All-risk insurance is
an insurance that covers a wide range of incidents and perils, except those
noted in the policy. All-risk insurance is different from peril-specific
insurance that cover losses from only those perils listed in the policy.[33] In car
insurance, all-risk policy includes also the damages caused by the
own driver.
High-value horses may be insured under a
bloodstock policy
·
Bloodstock insurance
covers individual horses or a number of horses under common ownership. Coverage is
typically for mortality as a result of accident, illness or disease but may
extend to include infertility, in-transit loss, veterinary fees, and
prospective foal.
·
Business interruption insurancecovers the loss of
income, and the expenses incurred, after a covered peril interrupts normal
business operations.
·
Defense Base Act (DBA) insurance provides coverage for civilian
workers hired by the government to perform contracts outside the United States
and Canada. DBA is required for all U.S. citizens, U.S. residents, U.S. Green
Card holders, and all employees or subcontractors hired on overseas government
contracts. Depending on the country, foreign nationals must also be covered
under DBA. This coverage typically includes expenses related to medical
treatment and loss of wages, as well as disability and death benefits.
·
Expatriate
insurance provides individuals
and organizations operating outside of their home country with protection for
automobiles, property, health, liability and business pursuits.
·
Legal expenses insurance covers policyholders for the potential costs
of legal action against an institution or an individual. When something happens
which triggers the need for legal action, it is known as "the event".
There are two main types of legal expenses insurance: before the event insurance andafter the event insurance.
·
Livestock insurance is
a specialist policy provided to, for example, commercial or hobby farms,
aquariums, fish farms or any other animal holding. Cover is available for
mortality or economic slaughter as a result of accident, illness or disease but
can extend to include destruction by government order.
·
Media liability
insurance is designed to cover professionals that engage in film and television
production and print, against risks such as defamation.
·
Nuclear incident
insurance covers damages resulting from an incident involving radioactive materials and is generally arranged at the national
level. (See the nuclear exclusion clause and for the US the Price-Anderson Nuclear Industries Indemnity Act.)
·
Pet insurance insures pets against accidents and illnesses;
some companies cover routine/wellness care and burial, as well.
·
Pollution
insurance usually takes the form
of first-party coverage for contamination of insured property either by
external or on-site sources. Coverage is also afforded for liability to third
parties arising from contamination of air, water, or land due to the sudden and
accidental release of hazardous materials from the insured site. The policy
usually covers the costs of cleanup and may include coverage for releases from
underground storage tanks. Intentional acts are specifically excluded.
·
Purchase insurance is
aimed at providing protection on the products people purchase. Purchase
insurance can cover individual purchase protection,warranties, guarantees, care
plans and even mobile phone insurance. Such insurance is normally very limited
in the scope of problems that are covered by the policy.
·
Tax insurance is
increasingly being used in corporate transactions to protect taxpayers in the
event that a tax position it has taken is challenged by the IRS or a state,
local, or foreign taxing authority[34]
·
Title insurance provides a guarantee that title to real property is vested in the purchaser and/or mortgagee, free and
clear of liens or encumbrances. It is usually issued in conjunction with a
search of the public records performed at the time of a real estate transaction.
·
Travel insurance is an insurance cover taken by those who
travel abroad, which covers certain losses such as medical expenses, loss of
personal belongings, travel delay, and personal liabilities.
·
Tuition insurance insures students against involuntary
withdrawal from cost-intensive educational institutions
·
Interest rate insurance protects the holder from adverse changes in interest rates, for
instance for those with a variable rate loan or mortgage
·
Divorce insurance is a form of contractual liability insurance
that pays the insured a cash benefit if their marriage ends in divorce.
Insurance financing vehicles
·
Fraternal insurance is
provided on a cooperative basis by fraternal
benefit societies or other social
organizations
·
No-fault
insurance is a type of insurance
policy (typically automobile insurance) where insureds are indemnified by their
own insurer regardless of fault in the incident.
·
Protected
self-insurance is an alternative risk financing mechanism in which an
organization retains the mathematically calculated cost of risk within the
organization and transfers the catastrophic risk with specific and aggregate
limits to an insurer so the maximum total cost of the program is known. A
properly designed and underwritten Protected Self-Insurance Program reduces and
stabilizes the cost of insurance and provides valuable risk management
information.
·
Retrospectively rated
insurance is a method of establishing a premium on large commercial accounts.
The final premium is based on the insured's actual loss experience during the
policy term, sometimes subject to a minimum and maximum premium, with the final
premium determined by a formula. Under this plan, the current year's premium is
based partially (or wholly) on the current year's losses, although the premium
adjustments may take months or years beyond the current year's expiration date.
The rating formula is guaranteed in the insurance contract. Formula:
retrospective premium = converted loss + basic premium × tax multiplier.
Numerous variations of this formula have been developed and are in use.
·
Formal self-insurance is the deliberate decision to pay for
otherwise insurable losses out of one's own money.[citation needed] This can be done on a formal basis by
establishing a separate fund into which funds are deposited on a periodic
basis, or by simply forgoing the purchase of available insurance and paying
out-of-pocket. Self-insurance is usually used to pay for high-frequency,
low-severity losses. Such losses, if covered by conventional insurance, mean
having to pay a premium that includes loadings for the company's general
expenses, cost of putting the policy on the books, acquisition expenses,
premium taxes, and contingencies. While this is true for all insurance, for
small, frequent losses the transaction costs may exceed the benefit of
volatility reduction that insurance otherwise affords.[citation needed]
·
Reinsurance is a type of insurance purchased by insurance
companies or self-insured employers to protect against unexpected losses. Financial reinsurance is a form of reinsurance that is primarily used for capital
management rather than to transfer insurance risk.
·
Social insurance can be many things to many people in many
countries. But a summary of its essence is that it is a collection of insurance
coverages (including components of life insurance, disability income insurance,
unemployment insurance, health insurance, and others), plus retirement savings,
that requires participation by all citizens. By forcing everyone in society to
be a policyholder and pay premiums, it ensures that everyone can become a
claimant when or if he/she needs to. Along the way this inevitably becomes
related to other concepts such as the justice system and thewelfare 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 Amish and someMuslim groups, depend on support provided by their communities whendisasters strike. The risk presented by any given person
is assumed collectively by the community who all bear the cost of rebuilding
lost property and supporting people whose needs are suddenly greater after a
loss of some kind. In supportive communities where others can be trusted to
follow community leaders, this tacit form of insurance can work. In this manner
the community can even out the extreme differences in insurability that exist
among its members. Some further justification is also provided by invoking the moral hazard of explicit insurance contracts.
In the United Kingdom, The Crown (which, for practical purposes, meant thecivil service) did
not insure property such as government buildings. If a government building was
damaged, the cost of repair would be met from public funds because, in the long
run, this was cheaper than paying insurance premiums. Since many UK government
buildings have been sold to property companies, and rented back, this
arrangement is now less common and may have disappeared altogether.
In the United States, the most prevalent form of self-insurance is governmental risk management pools. They
are self-funded cooperatives, operating as carriers of coverage for the
majority of governmental entities today, such as county governments,
municipalities, and school districts. Rather than these entities independently
self-insure and risk bankruptcy from a large judgment or catastrophic loss,
such governmental entities form a risk
pool. Such pools begin their operations by capitalization through
member deposits or bond issuance. Coverage (such as general liability, auto
liability, professional liability, workers compensation, and property) is
offered by the pool to its members, similar to coverage offered by insurance
companies. However, self-insured pools offer members lower rates (due to not
needing insurance brokers), increased benefits (such as loss prevention
services) and subject matter expertise. Of approximately 91,000 distinct
governmental entities operating in the United States, 75,000 are members of
self-insured pools in various lines of coverage, forming approximately 500
pools. Although a relatively small corner of the insurance market, the annual
contributions (self-insured premiums) to such pools have been estimated up to
17 billion dollars annually.
source: wikipedia, the free incyclopedia
source: wikipedia, the free incyclopedia
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