History
Early methods
Methods for transferring or distributing risk were practiced byModern methods
Insurance became far more sophisticated in Enlightenment-eraPrinciples
Insurance involves pooling funds from ''many'' insured entities (known as exposures) to pay for the losses that only some insureds may incur. The insured entities are therefore protected from risk for a fee, with the fee being dependent upon the frequency and severity of the event occurring. In order to be an insurable risk, the risk insured against must meet certain characteristics. Insurance as a financial intermediary is a commercial enterprise and a major part of the financial services industry, but individual entities can also self-insure through saving money for possible future losses.Insurability
Risk which can be insured by private companies typically share seven common characteristics: # Large number of similar exposure units: Since insurance operates through pooling resources, the majority of insurance policies cover individual members of large classes, allowing insurers to benefit from theLegal
When a company insures an individual entity, there are basic legal requirements and regulations. Several commonly cited legal principles of insurance include: #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,Exclusions
Policies typically include a number of exclusions, for example: * Nuclear exclusion clause, excluding damage caused by nuclear and radiation accidents * War exclusion clause, excluding damage from acts of war or terrorism. Insurers may prohibit certain activities which are considered dangerous and therefore excluded from coverage. One system for classifying activities according to whether they are authorised by insurers refers to "green light" approved activities and events, "yellow light" activities and events which require insurer consultation and/or waivers of liability, and "red light" activities and events which are prohibited and outside the scope of insurance cover.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,Methods of insurance
According to the study books of The Chartered Insurance Institute, there are variant methods of insurance as follows: # Co-insurance – risks shared between insurers (sometimes referred to as "Retention") # Dual insurance – having two or more policies with overlapping coverage of a risk (both the individual policies would not pay separately – under a concept named contribution, they would contribute together to make up the policyholder's losses. However, in case of contingency insurances such as life insurance, dual payment is allowed) # Self-insurance – situations where risk is not transferred to insurance companies and solely retained by the entities or individuals themselves # Reinsurance – situations when the insurer passes some part of or all risks to another Insurer, called the reinsurerInsurers' business model
Insurers may use theUnderwriting and investing
Insurers' business model aims 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: * ThroughClaims
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 Insurance broker, 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, insurance fraud, 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 agency (law), insurance agents to initially market or Underwriting, 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 the availability of improved and personalised services. Companies also use Broking firms, Banks and other corporate entities (like Self Help Groups, Microfinance Institutions, NGOs, etc.) to market their products.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 an traffic collision, accident). A home insurance policy in the United States typically includes coverage for damage to the home and the owner's belongings, certain legal claims against the owner, and even a small amount of coverage for medical expenses of guests who are injured on the owner's property. Business insurance can take a number of different forms, such as the various kinds of professional liability insurance, also called professional indemnity (PI), which are discussed below under that name; and the business owner's policy (BOP), which packages into one policy many of the kinds of coverage that a business owner needs, in a way analogous to how homeowners' insurance packages the coverages that a homeowner needs.Vehicle insurance
Vehicle 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 expensesGap insurance
Gap insurance covers the excess amount on an auto loan in an instance where the policyholder's 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 through 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 as mortgage loans and credit cards. Short-term and long-term disability policies are available to individuals, but considering the expense, long-term policies are generally obtained only by those with at least six-figure incomes, such as doctors, lawyers, etc. Short-term disability insurance covers a person for a period typically up to six months, paying a stipend each month to cover medical bills and other necessities. * Long-term disability insurance covers an individual's expenses for the long term, up until such time as they are considered permanently disabled and thereafter Insurance companies will often try to encourage the person back into employment in preference to and before declaring them unable to work at all and therefore totally disabled. * Business overhead expense disability insurance, Disability overhead insurance allows business owners to cover the overhead expenses of their business while they are unable to work. * Total permanent disability insurance provides benefits when a person is permanently disabled and can no longer work in their profession, often taken as an adjunct to life insurance. * Workers' compensation insurance replaces all or part of a worker's wages lost and accompanying medical expenses incurred because of a job-related injury.Casualty insurance
Casualty insurance insures against accidents, not necessarily tied to any specific property. It is a broad spectrum of insurance that a number of other types of insurance could be classified, such as auto, workers compensation, and some liability insurances. * Crime insurance is a form of casualty insurance that covers the policyholder against losses arising from the criminal acts of third parties. For example, a company can obtain crime insurance to cover losses arising from theft or embezzlement. * Terrorism insurance provides protection against any loss or damage caused by terrorism, terrorist activities. In the United States in the wake of september 11 attacks, 9/11, the Terrorism Risk Insurance Act 2002 (TRIA) set up a federal program providing a transparent system of shared public and private compensation for insured losses resulting from acts of terrorism. The program was extended until the end of 2014 by the Terrorism Risk Insurance Program Reauthorization Act 2007 (TRIPRA). * Kidnap and ransom insurance is designed to protect individuals and corporations operating in high-risk areas around the world against the perils of kidnap, extortion, wrongful detention and hijacking. * Political risk insurance is a form of casualty insurance that can be taken out by businesses with operations in countries in which there is a risk that revolution or other politics, political conditions could result in a loss.Life insurance
Life insurance provides a monetary benefit to a decedent's family or other designated beneficiary, and may specifically provide for income to an insured person's family, burial, funeral and other final expenses. Life insurance policies often allow the option of having the proceeds paid to the beneficiary either in a lump sum cash payment or an Annuity (financial contracts), annuity. In most states, a person cannot purchase a policy on another person without their knowledge. Annuities provide a stream of payments and are generally classified as insurance because they are issued by insurance companies, are regulated as insurance, and require the same kinds of actuarial and investment management expertise that life insurance requires. Annuities and pensions that pay a benefit for life are sometimes regarded as insurance against the possibility that a retirement, 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 policy, endowment policies, are financial instruments to accumulate or liquidation, liquidate wealth when it is needed. In many countries, such as the United States and the UK, the tax law provides that the interest on this cash value is not taxable under certain circumstances. This leads to widespread use of life insurance as a tax-efficient method of saving as well as protection in the event of early death. In the United States, the tax on interest income on life insurance policies and annuities is generally deferred. However, in some cases the benefit derived from tax deferral may be offset by a low return. This depends upon the insuring company, the type of policy and other variables (mortality, market return, etc.). Moreover, other income tax saving vehicles (e.g., IRAs, 401(k) plans, Roth IRAs) may be better alternatives for value accumulation.Burial insurance
Burial insurance is an old type of life insurance which is paid out upon death to cover final expenses, such as the cost of a funeral. The Ancient Greece, Greeks and Ancient Rome, Romans introduced burial insurance c. 600 CE when they organized guilds called "benevolent societies" which cared for the surviving families and paid funeral expenses of members upon death. Guilds in the Middle Ages served a similar purpose, as did friendly societies during Victorian times.Property
Property insurance provides protection against risks to property, such as fire, theft or weather damage. This may include specialized forms of insurance such as fire insurance, flood insurance, earthquake insurance, home insurance, inland marine insurance or boiler insurance. The term ''property insurance'' may, like casualty insurance, be used as a broad category of various subtypes of insurance, some of which are listed below: * Aviation insurance protects aircraft hulls and spares, and associated liability risks, such as passenger and third-party liability. Airports may also appear under this subcategory, including air traffic control and refuelling operations for international airports through to smaller domestic exposures. * Boiler insurance (also known as boiler and machinery insurance, or equipment breakdown insurance) insures against accidental physical damage to boilers, equipment or machinery. * Builder's risk insurance insures against the risk of physical loss or damage to property during construction. Builder's risk insurance is typically written on an "all risk" basis covering damage arising from any cause (including the negligence of the insured) not otherwise expressly excluded. Builder's risk insurance is coverage that protects a person's or organization's insurable interest in materials, fixtures or equipment being used in the construction or renovation of a building or structure should those items sustain physical loss or damage from an insured peril. * Crop insurance may be purchased by farmers to reduce or manage various risks associated with growing crops. Such risks include crop loss or damage caused by weather, hail, drought, frost damage, pests (including especially insects), or disease - some of these being termed named perils. Index-based insurance uses models of how climate extremes affect crop production to define certain climate triggers that if surpassed have high probabilities of causing substantial crop loss. When harvest losses occur associated with exceeding the climate trigger threshold, the index-insured farmer is entitled to a compensation payment. * 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 highLiability
Liability insurance is a 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. * Professional liability insurance, 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, hole-in-one at a golf tournament. * Professional liability insurance, also called professional indemnity insurance (PI), protects insured professionals such as architectural corporations and medical practitioners against potential negligence claims made by their patients/clients. Professional liability insurance may take on different names depending on the profession. For example, professional liability insurance in reference to the medical profession may be called medical malpractice insurance. Often a commercial insured's liability insurance program consists of several layers. The first layer of insurance generally consists of primary insurance, which provides first dollar indemnity for judgments and settlements up to the limits of liability of the primary policy. Generally, primary insurance is subject to a deductible and obligates the insured to defend the insured against lawsuits, which is normally accomplished by assigning counsel to defend the insured. In many instances, a commercial insured may elect to self-insure. Above the primary insurance or self-insured retention, the insured may have one or more layers of excess insurance to provide coverage additional limits of indemnity protection. There are a variety of types of excess insurance, including "stand-alone" excess policies (policies that contain their own terms, conditions, and exclusions), "follow form" excess insurance (policies that follow the terms of the underlying policy except as specifically provided), and "umbrella" insurance policies (excess insurance that in some circumstances could provide coverage that is broader than the underlying insurance).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.Cyber attack insurance
cyber insurance, Cyber-insurance is a business lines insurance product intended to provide coverage to corporations from Internet-based Risk, risks, and more generally from risks relating to information technology infrastructure, information privacy, information governance liability, and activities related thereto.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. In car insurance, all-risk policy includes also the damages caused by the own driver. * Bloodstock insurance covers individual horses or a number of horses under common ownership. Coverage is typically for mortality as a result of accident, illness or disease but may extend to include infertility, in-transit loss, veterinary fees, and prospective foal. * Business interruption insurance covers the loss of income, and the expenses incurred, after a covered peril interrupts normal business operations. * Defense Base Act (DBA) insurance provides coverage for civilian workers hired by the government to perform contracts outside the United States and Canada. DBA is required for all U.S. citizens, U.S. residents, U.S. Green Card holders, and all employees or subcontractors hired on overseas government contracts. Depending on the country, foreign nationals must also be covered under DBA. This coverage typically includes expenses related to medical treatment and loss of wages, as well as disability and death benefits. * Expatriate insurance provides individuals and organizations operating outside of their home country with protection for automobiles, property, health, liability and business pursuits. *Hired-in Plant Insurance covers liability where, under a contract of hire, the customer is liable to pay for the cost of Plant Hire, hired-in equipment and for any rental charges due to a plant hire firm, such as construction plant and machinery. * 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: Legal expenses insurance#Before the event insurance, before the event insurance and Legal expenses insurance#After the event insurance, after the event insurance. * Livestock insurance is a specialist policy provided to, for example, commercial or hobby farms, aquariums, fish farms or any other animal holding. Cover is available for mortality or economic slaughter as a result of accident, illness or disease but can extend to include destruction by government order. * Media liability insurance is designed to cover professionals that engage in film and television production and print, against risks such as defamation. * Nuclear incident insurance covers damages resulting from an nuclear and radiation accidents, incident involving radioactive materials and is generally arranged at the national level. (See the nuclear exclusion clause and, for the United States, the Price–Anderson Nuclear Industries Indemnity Act.) * Over-redemption insurance is purchased by businesses to protect themselves financially in the event that a promotion ends up becoming more successful than was originally anticipated and/or budgeted for. * 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, Warranty, warranties, guarantees, care plans and even mobile phone insurance. Such insurance is normally 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 * Title insurance provides a guarantee that title to real property is vested in the purchaser or mortgage law, 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 Benefit society, 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 (active risk retention) is the deliberate decision to pay for otherwise insurable losses out of one's own money. 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. * 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 they need to. Along the way, this inevitably becomes related to other concepts such as the justice system and theClosed community and governmental self-insurance
Some communities prefer to create virtual insurance among themselves by other means than contractual risk transfer, which assigns explicit numerical values to risk. A number of religion, religious groups, including the Amish and some Muslim groups, depend on support provided by their community, communities when disasters strike. The risk presented by any given person is assumed collectively by the community who all bear the cost of rebuilding lost property and supporting people whose needs are suddenly greater after a loss of some kind. In supportive communities where others can be trusted to follow community leaders, this tacit form of insurance can work. In this manner the community can even out the extreme differences in insurability that exist among its members. Some further justification is also provided by invoking the moral hazard of explicit insurance contracts. In the United Kingdom, The Crown (which, for practical purposes, meant the civil service) did not insure property such as government buildings. If a government building was damaged, the cost of repair would be met from public funds because, in the long run, this was cheaper than paying insurance premiums. Since many UK government buildings have been sold to property companies and rented back, this arrangement is now less common. 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.Insurance companies
Insurance companies may provide any combination of insurance types, but are often classified into three groups: *Mutual versus proprietary
Insurance companies are commonly classified as either Mutual insurance, mutual or proprietary companies. Mutual companies are owned by the policyholders, while shareholders (who may or may not own policies) own proprietary insurance companies. Demutualization of mutual insurers to form stock companies, as well as the formation of a hybrid known as a mutual holding company, became common in some countries, such as the United States, in the late 20th century. However, not all states permit mutual holding companies.Reinsurance companies
Reinsurance companies are insurance companies that provide policies to other insurance companies, allowing them to reduce their risks and protect themselves from substantial losses. The reinsurance market is dominated by a few large companies with huge reserves. A reinsurer may also be a direct writer of insurance risks as well.Captive insurance companies
Captive insurance companies can be defined as limited-purpose insurance companies established with the specific objective of financing risks emanating from their parent group or groups. This definition can sometimes be extended to include some of the risks of the parent company's customers. In short, it is an in-house self-insurance vehicle. Captives may take the form of a "pure" entity, which is a 100% subsidiary of the self-insured parent company; of a "mutual" captive, which insures the collective risks of members of an industr); and of an "association" captive, which self-insures individual risks of the members of a professional, commercial or industrial association. Captives represent commercial, economic and tax advantages to their sponsors because of the reductions in costs they help create and for the ease of insurance risk management and the flexibility for cash flows they generate. Additionally, they may provide coverage of risks which is neither available nor offered in the traditional insurance market at reasonable prices. The types of risk that a captive can underwrite for their parents include property damage, public and product liability, professional indemnity, employee benefits, employers' liability, motor and medical aid expenses. The captive's exposure to such risks may be limited by the use of reinsurance. Captives are becoming an increasingly important component of the risk management and risk financing strategy of their parent. This can be understood against the following background: * Heavy and increasing premium costs in almost every line of coverage * Difficulties in insuring certain types of fortuitous risk * Differential coverage standards in various parts of the world * Rating structures which reflect market trends rather than individual loss experience * Insufficient credit for deductibles or loss control effortsOther forms
Other possible forms for an insurance company include reciprocal inter-insurance exchange, reciprocals, in which policyholders reciprocate in sharing risks, and Lloyd's organizations.Admitted versus non-admitted
Admitted insurance companies are those in the United States that have been admitted or licensed by the state licensing agency. The insurance they provide is called admitted insurance. Non-admitted companies have not been approved by the state licensing agency, but are allowed to provide insurance under special circumstances when they meet an insurance need that admitted companies cannot or will not meet.Insurance consultants
There are also companies known as "insurance consultants". Like a mortgage broker, these companies are paid a fee by the customer to shop around for the best insurance policy among many companies. Similar to an insurance consultant, an "insurance broker" also shops around for the best insurance policy among many companies. However, with insurance brokers, the fee is usually paid in the form of commission from the insurer that is selected rather than directly from the client. Neither insurance consultants nor insurance brokers are insurance companies and no risks are transferred to them in insurance transactions. Third party administrators are companies that perform underwriting and sometimes claims handling services for insurance companies. These companies often have special expertise that the insurance companies do not have.Financial stability and rating
The financial stability and strength of an insurance company is a consideration when buying an insurance contract. An insurance premium paid currently provides coverage for losses that might arise many years in the future. For that reason, a more financially stable insurance carrier reduces the risk of the insurance company becoming insolvent, leaving their policyholders with no coverage (or coverage only from a government-backed insurance pool or other arrangements with less attractive payouts for losses). A number of independent rating agencies provide information and rate the financial viability of insurance companies. Insurance companies are rated by various agencies such as AM Best. The ratings include the company's financial strength, which measures its ability to pay claims. It also rates financial instruments issued by the insurance company, such as bonds, notes, and securitization products.Across the world
Advanced economies account for the bulk of the global insurance industry. According to Swiss Re, the global insurance market wrote $6.287 trillion in direct premiums in 2020. ("Direct premiums" means premiums written directly by insurers before accounting for ceding of risk to reinsurers.) As usual, the United States was the country with the largest insurance market with $2.530 trillion (40.3%) of direct premiums written, with the People's Republic of China coming in second at only $574 billion (9.3%), Japan coming in third at $438 billion (7.1%), and the United Kingdom coming in fourth at $380 billion (6.2%). However, the European Union's European Single Market, single market is the actual second largest market, with 18 percent market share.Regulatory differences
In the United States, insurance is regulated by the states under the McCarran–Ferguson Act, McCarran-Ferguson Act, with "periodic proposals for federal intervention", and a nonprofit coalition of state insurance agencies called the National Association of Insurance Commissioners works to harmonize the country's different laws and regulations. The National Conference of Insurance Legislators (NCOIL) also works to harmonize the different state laws. In the European Union, the Third Non-Life Directive and the Third Life Directive, both passed in 1992 and effective 1994, created a single insurance market in Europe and allowed insurance companies to offer insurance anywhere in the EU (subject to permission from authority in the head office) and allowed insurance consumers to purchase insurance from any insurer in the EU. As far as insurance in the United Kingdom, the Financial Services Authority took over insurance regulation from the General Insurance Standards Council in 2005; laws passed include the Insurance Companies Act 1973 and another in 1982, and reforms to warranty and other aspects under discussion . The insurance industry in China was nationalized in 1949 and thereafter offered by only a single state-owned company, the People's Insurance Company of China, which was eventually suspended as demand declined in a communist environment. In 1978, market reforms led to an increase in the market and by 1995 a comprehensive Insurance Law of the People's Republic of China was passed, followed in 1998 by the formation of China Insurance Regulatory Commission (CIRC), which has broad regulatory authority over the insurance market of China. In India IRDA is insurance regulatory authority. As per the section 4 of IRDA Act 1999, Insurance Regulatory and Development Authority (IRDA), which was constituted by an act of parliament. National Insurance Academy, Pune is apex insurance capacity builder institute promoted with support from Ministry of Finance and by LIC, Life & General Insurance companies. In 2017, within the framework of the joint project of the Central Bank of Russia, Bank of Russia and Yandex, a special check mark (a green circle with a tick and 'Реестр ЦБ РФ' (Unified state register of insurance entities) text box) appeared in the search for Yandex system, informing the consumer that the company's financial services are offered on the marked website, which has the status of an insurance company, a broker or a mutual insurance association.Controversies
Does not reduce the risk
Insurance is just a risk transfer mechanism wherein the financial burden which may arise due to some fortuitous event is transferred to a bigger entity (i.e., an insurance company) by way of paying premiums. This only reduces the financial burden and not the actual chances of happening of an event. Insurance is a risk for both the insurance company and the insured. The insurance company understands the risk involved and will perform a risk assessment when writing the policy. As a result, the premiums may go up if they determine that the policyholder will file a claim. However, premiums might reduce if the policyholder commits to a risk management program as recommended by the insurer. It's therefore important that insurers view risk management as a joint initiative between policyholder and insurer since a robust risk management plan minimizes the possibility of a large claim for the insurer while stabilizing or reducing premiums for the policyholder. If a person is financially stable and plans for life's unexpected events, they may be able to go without insurance. However, they must have enough to cover a total and complete loss of employment and of their possessions. Some states will accept a surety bond, a government bond, or even making a cash deposit with the state.Moral hazard
An insurance company may inadvertently find that its insureds may not be as risk-averse as they might otherwise be (since, by definition, the insured has transferred the risk to the insurer), a concept known as moral hazard. This 'insulates' many from the true costs of living with risk, negating measures that can mitigate or adapt to risk and leading some to describe insurance schemes as potentially Maladaptation, maladaptive.Complexity of insurance policy contracts
Insurance policies can be complex and some policyholders may not understand all the fees and coverages included in a policy. As a result, people may buy policies on unfavorable terms. In response to these issues, many countries have enacted detailed statutory and regulatory regimes governing every aspect of the insurance business, including minimum standards for policies and the ways in which they may be advertising, advertised and sold. For example, most insurance policies in the English language today have been carefully drafted in plain English; the industry learned the hard way that many courts will not enforce policies against insureds when the judges themselves cannot understand what the policies are saying. Typically, courts construe ambiguities in insurance policies against the insurance company and in favor of coverage under the policy. Many institutional insurance purchasers buy insurance through an insurance broker. While on the surface it appears the broker represents the buyer (not the insurance company), and typically counsels the buyer on appropriate coverage and policy limitations, in the vast majority of cases a broker's compensation comes in the form of a commission as a percentage of the insurance premium, creating a conflict of interest in that the broker's financial interest is tilted toward encouraging an insured to purchase more insurance than might be necessary at a higher price. A broker generally holds contracts with many insurers, thereby allowing the broker to "shop" the Market (economics), market for the best rates and coverage possible. Insurance may also be purchased through an agent. A tied agent, working exclusively with one insurer, represents the insurance company from whom the policyholder buys (while a free agent sells policies of various insurance companies). Just as there is a potential conflict of interest with a broker, an agent has a different type of conflict. Because agents work directly for the insurance company, if there is a claim the agent may advise the client to the benefit of the insurance company. Agents generally cannot offer as broad a range of selection compared to an insurance broker. An independent insurance consultant advises insureds on a fee-for-service retainer, similar to an attorney, and thus offers completely independent advice, free of the financial conflict of interest of brokers or agents. However, such a consultant must still work through brokers or agents in order to secure coverage for their clients.Limited consumer benefits
In the United States, economists and consumer advocates generally consider insurance to be worthwhile for low-probability, catastrophic losses, but not for high-probability, small losses. Because of this, consumers are advised to select highRedlining
Redlining is the practice of denying insurance coverage in specific geographic areas, supposedly because of a high likelihood of loss, while the alleged motivation is unlawful discrimination. Racial profiling or redlining has a long history in the property insurance industry in the United States. From a review of industry underwriting and marketing materials, court documents, and research by government agencies, industry and community groups, and academics, it is clear that race has long affected and continues to affect the policies and practices of the insurance industry. In July 2007, the US Federal Trade Commission (FTC) released a report presenting the results of a study concerning credit-based insurance scores in automobile insurance. The study found that these scores are effective predictors of risk. It also showed that African-Americans and Hispanics are substantially overrepresented in the lowest credit scores, and substantially underrepresented in the highest, while Caucasians and Asians are more evenly spread across the scores. The credit scores were also found to predict risk within each of the ethnic groups, leading the FTC to conclude that the scoring models are not solely proxies for redlining. The FTC indicated little data was available to evaluate benefit of insurance scores to consumers.Credit-Based Insurance Scores: Impacts on Consumers of Automobile InsuranceInsurance patents
New assurance products can now be protected from copying with a business method patent in the United States. A recent example of a new insurance product that is patented is Usage-based insurance, Usage Based vehicle insurance, auto insurance. Early versions were independently invented and patented by a major US auto insurance company, Progressive Corporation, Progressive Auto Insurance () and a Spanish independent inventor, Salvador Minguijon Perez. Many independent inventors are in favor of patenting new insurance products since it gives them protection from big companies when they bring their new insurance products to market. Independent inventors account for 70% of the new U.S. patent applications in this area. Many insurance executives are opposed to patenting insurance products because it creates a new risk for them. The Hartford insurance company, for example, recently had to pay $80 million to an independent inventor, Bancorp Services, in order to settle a patent infringement and theft of trade secret lawsuit for a type of corporate owned life insurance product invented and patented by Bancorp. There are currently about 150 new patent applications on insurance inventions filed per year in the United States. The rate at which patents have been issued has steadily risen from 15 in 2002 to 44 in 2006. The first insurance patent to be granted was including another example of an application posted was. It was posted on 6 March 2009. This patent application describes a method for increasing the ease of changing insurance companies.Insurance on demand
Insurance on demand (also IoD) is an insurance service that provides clients with insurance protection when they need, i.e. only episodic rather than on 24/7 service, 24/7 basis as typically provided by traditional insurers (e.g. clients can purchase an insurance for one single flight rather than a longer-lasting travel insurance plan).Insurance industry and rent-seeking
Certain insurance products and practices have been described as rent-seeking by critics. 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.Religious concerns
Muslim scholars have varying opinions about life insurance. Life insurance policies that earn interest (or guaranteed bonus/NAV) are generally considered to be a form of ''riba'' (usury) and some consider even policies that do not earn interest to be a form of ''gharar'' (speculation). Some argue that ''gharar'' is not present due to the actuarial science behind the underwriting. Jewish rabbinical scholars also have expressed reservations regarding insurance as an avoidance of God's will but most find it acceptable in moderation. Some Christians believe insurance represents a lack of faith and there is a long history of resistance to commercial insurance in Anabaptist communities (Mennonites, Amish, Hutterites, Brethren in Christ) but many participate in community-based self-insurance programs that spread risk within their communities.See also
* Agent of record * DIRTI 5 * Earthquake insurance, Earthquake loss * Financial adviser * Financial services (broader industry to which insurance belongs) * Geneva Association (the International Association for the Study of Insurance Economics) * Global assets under management * Insurance broker * Insurance fraud * Insurance Hall of Fame * Insurance law * Insurance Premium Tax (UK) * List of Acts of Parliament of the United Kingdom Parliament, 1960-1979#Public Acts 19, List of Acts of Parliament of the United Kingdom Parliament, 1960-1979 * Loss-control consultant * Reinsurance * Risk pool, Intergovernmental Risk Pool * ''The Invisible Bankers: Everything the Insurance Industry Never Wanted You to Know'' (book) * Outline of finance, List of finance topics * Outline of finance#Insurance, List of insurance topics * List of United States insurance companies * Social security * ''Notes
References
Citations
Sources
*Further reading
Insurance Law and Regulation: Cases and Materials by Kenneth S. Abraham. New York, N.Y : Foundation Press, 2005.External links