Tara baap ni gand

Introduction:

The Indian insurance industry after the privatization of the insurance

sector in 2000 has witnessed the entry of various private and foreign insurance companies

.Due to privatization the competition in the insurance sector has became severe and in

order to attract the customer and to retain them with the company the insurance

companies has brought a huge number of innovation in the insurance industry.

The innovation was both in the product range as well as in distribution

channel and marketing strategy. A number of new products are introduced by the

insurance companies to attract the customers which are explained in detailed in this

project further. The size of the Indian insurance market is very big as the crores and

crores of people are uninsured and the penetration of the life insurance is also very low.

With a view to increase the awareness and to provide knowledge to the potential

customers the insurance companies have also innovated various distribution and

marketing channels such as banc assurance , broker,agency,etc,which are also explained

in the project.

INSURANCE SECTOT REFORMS

In 1993, Malhotra committee, headed by former finance secretary and RBI gocverner,

R.N Malhotra was formed to evaluate the Indian insurance industry and recommended its

future direction.

The committee was set up with an objective of completing the reforms in the Indian

financial sector. The reforms was aimed at “creating a more efficient and competitive

financial system suitable for the requirements of the economy keeping in mind the

structural changes currently underway and recognizing that insurance is an important part

of the overall financial system where it was necessary to address the need for similar

reforms.

PURPOSE:

Insurance From Wikipedia, the free encyclopedia

Jump to: navigation, searchThis article is about the risk management method. For insurance in blackjack, see Blackjack.

Financial market participants

�• Credit unions Insurance companies Investment banks Investment funds

Pension funds Prime brokers Trusts

• Finance Financial market Participants Corporate finance Personal finance Public finance Banks and banking Financial regulation

• v t e Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange for payment. It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. An insurer, or insurance carrier, is a company selling the insurance; the insured, or policyholder, is the person or entity buying the insurance policy. The amount of money to be charged for a certain amount of insurance coverage is called the premium. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice.The 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 (indemnify) the insured in the case of a financial (personal) loss. The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insured will be financially compensated.

Contents  [hide] 1 History

1.1 Early methods 1.2 Modern insurance

2 Principles 2.1 Insurability 2.2 Legal 2.3 Indemnification

3 Societal effects 3.1 Methods of insurance

4 Insurers' business model 4.1 Underwriting and investing 4.2 Claims 4.3 Marketing

5 Types of insurance 5.1 Auto insurance

5.1.1 Gap insurance 5.2 Health insurance 5.3 Accident, sickness, and unemployment insurance

5.4 Casualty 5.5 Life

5.5.1 Burial insurance 5.6 Property 5.7 Liability 5.8 Credit 5.9 Other types 5.10 Insurance financing vehicles 5.11 Closed community self-insurance

6 Insurance companies 7 Across the world

7.1 Regulatory differences 8 Controversies

8.1 Insurance insulates too much 8.2 Complexity of insurance policy contracts 8.3 Limited consumer benefits 8.4 Redlining 8.5 Insurance patents 8.6 The insurance industry and rent-seeking 8.7 Religious concerns

9 See also 10 Notes 11 Bibliography 12 External links

History[edit] Main article: History of insuranceEarly methods[edit]

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Merchants have sought methods to minimize risks since early times. Pictured, Governors of the Wine Merchant's Guild by Ferdinand Bol, c. 1680.

Methods for transferring or distributing risk were practiced by Chinese and Babylonian traders as long ago as the 3rd and 2nd millennia BC, respectively.[1] Chinese merchants travelling treacherous river rapids would redistribute their wares across many vessels to limit the loss due to any single vessel's capsizing. The Babylonians developed a system which was recorded in the famous Code of Hammurabi, c. 1750 BC, and practiced by early Mediterranean sailing merchants. If a merchant received a loan to fund his shipment, he would pay the lender an additional sum in exchange for the lender's guarantee to cancel the loan should the shipment be stolen or lost at sea.At some point in the 1st millennium BC, the inhabitants of Rhodes created the 'general average'. This allowed groups of merchants to pay to insure their goods being shipped together. The collected premiums would be used to reimburse any merchant whose goods were jettisoned during transport, whether to storm or sinkage.[2]

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[edit]Insurance became far more sophisticated in Enlightenment era Europe, and specialized varieties developed.

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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".[4] 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.[5]

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 centre 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.[6]

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Leaflet promoting the National Insurance Act 1911.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.[7][8] Edward Rowe Mores established the Society for Equitable Assurances on Lives and Survivorship in 1762.It was the world's first mutual insurer and it pioneered age based premiums based on mortality rate laying "the framework for scientific insurance practice and development" and "the basis of modern life assurance upon which all life assurance schemes were subsequently based".[9]

In the late 19th century, "accident insurance" began to become available. This operated much like modern disability insurance.[10][11] The first company to offer accident insurance was the Railway Passengers Assurance Company, formed in 1848 in England to insure against the rising number of fatalities on the nascent railway system.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.[12][13] In Britain more extensive legislation was introduced by the Liberal government in the 1911 National Insurance Act. This gave the British working classes the first contributory system of insurance against illness and unemployment.[14] This system was greatly expanded after the Second World War under the influence of the Beveridge Report, to form the first modern welfare state.[12][15]

Principles[edit] 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 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.[16]

Insurability[edit]Main article: InsurabilityRisk which can be insured by private companies typically shares seven common characteristics:[17]

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. Capital constrains 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[edit]When a company insures an individual entity, there are basic legal requirements and regulations. Several commonly cited legal principles of insurance include:[18]

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[edit]Main article: IndemnityTo "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[19] 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.[19][20]

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.Societal effects[edit] 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

moral hazard to refer to increased risk due to intentional carelessness or indifference.[21] 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.[22]

Methods of insurance[edit]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

coverage3 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

Insurers' business model[edit]

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Accidents will happen (William H. Watson, 1922) is a slapstick silent film about the methods and mishaps of an insurance broker. Collection EYE Film Institute Netherlands.Underwriting and investing[edit]

The business model is to collect more in premium and investment income than is paid out in losses, and to also offer a competitive price which consumers will accept. Profit can be reduced to a simple equation:Profit = earned premium + investment income – incurred loss – underwriting expenses.Insurers make money in two ways:

• Through underwriting, the process by which insurers select the risks to insure and decide how much in premiums to charge for accepting those risks

• By investing the premiums they collect from insured parties The most complicated aspect of the insurance business is the actuarial science of ratemaking (price-setting) of policies, which uses statistics and probability to approximate the rate of future claims based on a given risk. After producing rates, the insurer will use discretion to reject or accept risks through the underwriting process.At the most basic level, initial ratemaking involves looking at the frequency and severity of insured perils and the expected average payout resulting from these perils. Thereafter an insurance company will collect historical loss data, bring the loss data to present value, and compare these prior losses to the premium collected in order to assess rate adequacy.[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. The Association of British Insurers (gathering 400 insurance companies and 94% of UK insurance services) has almost 20% of the investments in the London Stock Exchange.[25]

In the United States, the underwriting loss of property and casualty insurance companies was $142.3 billion in the five years ending 2003. But overall profit for the same period was $68.4 billion, as the result of float. Some insurance industry insiders, most notably 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 depressed period. Bear markets do cause insurers to shift away from investments and to toughen up their underwriting standards, so a poor economy generally means high insurance premiums. This tendency to swing between profitable and unprofitable periods over time is commonly known as the underwriting, or insurance, cycle.[26]

Claims[edit]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[edit]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.[27]

Types of insurance[edit] 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 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.[28]

Auto insurance[edit]Main article: Vehicle insurance

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A wrecked vehicle in CopenhagenAuto 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[edit]Main article: Gap insuranceGap 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 companies 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 your finance company when you first purchase your vehicle. Most auto insurance companies offer this coverage to consumers as well. If you are unsure if GAP coverage had been purchased, you should check your vehicle lease or purchase documentation.Health insurance[edit]Main articles: Health insurance and Dental insurance

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Great Western Hospital, SwindonHealth 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.Accident, sickness, and unemployment insurance[edit]

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Workers' compensation, or employers' liability insurance, is compulsory in some countries

• Disability insurance policies provide financial support in the event of the policyholder becoming unable to work because of disabling illness or injury. It provides monthly support to help pay such obligations as mortgage loans and credit cards. Short-term and long-term disability policies are available to individuals, but considering the expense, long-term policies are generally obtained only by those with at least six-figure incomes, such as doctors, lawyers, etc. Short-term disability insurance covers a person for a period typically up to six months, paying a stipend each month to cover medical bills and other necessities.

• Long-term disability insurance covers an individual's expenses for the long term, up until such time as they are considered permanently disabled and thereafter. 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 wages lost and accompanying medical expenses incurred because of a job-related injury.

Casualty[edit]Main article: Casualty insuranceCasualty 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.

• 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 political conditions could result in a loss.

Life[edit]Main article: Life insurance

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Amicable Society for a Perpetual Assurance Office, Serjeants' Inn, Fleet Street, London, 1801

Life insurance provides a monetary benefit to a decedent's family or other designated beneficiary, and may specifically provide for income to an insured person's family, burial, funeral and other final expenses. Life insurance policies often allow the option of having the proceeds paid to the beneficiary either in a lump sum cash payment or an annuity. In most states, a person cannot purchase a policy on another person without their knowledge.Annuities provide a stream of payments and are generally classified as insurance because they are issued by insurance companies, are regulated as insurance, and require the same kinds of actuarial and investment management expertise that life insurance requires. Annuities and pensions that pay a benefit for life are sometimes regarded as insurance against the possibility that a retiree will outlive his or her financial resources. In that sense, they are the complement of life insurance and, from an underwriting perspective, are the mirror image of life insurance.Certain life insurance contracts accumulate cash values, which may be taken by the insured if the policy is surrendered or which may be borrowed against. Some policies, such as annuities and endowment policies, are financial instruments to accumulate or liquidate wealth when it is needed.In many countries, such as the 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[edit]Burial insurance is a very old type of life insurance which is paid out upon death to cover final expenses, such as the cost of a funeral. The Greeks and Romans introduced burial insurance c. 600 CE when they organized guilds called "benevolent societies" which cared for

the surviving families and paid funeral expenses of members upon death. Guilds in the Middle Ages served a similar purpose, as did friendly societies during Victorian times.Property[edit]Main article: Property insurance

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This tornado damage to an Illinois home would be considered an "Act of God" for insurance purposes

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:

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US Airways Flight 1549 was written off after ditching into the Hudson River• Aviation insurance protects aircraft hulls and spares, and

associated liability risks, such as passenger and third-party liability. Airports may also appear under this subcategory, including air traffic control and refuelling operations for international airports through to smaller domestic exposures.

• Boiler insurance (also known as boiler and machinery insurance, or equipment breakdown insurance) insures against accidental physical damage to boilers, equipment or machinery.

• Builder's risk insurance insures against the risk of physical loss or damage to property during construction. Builder's risk insurance is typically written on an "all risk" basis covering damage arising from any cause (including the negligence of the insured) not otherwise expressly excluded. Builder's risk insurance is coverage that protects a person's or organization's insurable interest in materials, fixtures 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.[29]

• 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.[30]

• 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.

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Hurricane Katrina caused over $80 billion of storm and flood damage• Flood insurance protects against property loss due to flooding.

Many U.S. insurers do not provide flood insurance in some parts of the country. In response to this, the federal government created the National Flood Insurance Program which serves as the insurer of last resort.

• Home insurance, also commonly called hazard insurance or homeowners insurance (often abbreviated in the real estate industry as HOI), provides coverage for damage or destruction of the policyholder's home. In some geographical areas, the policy may exclude certain types of risks, such as flood or earthquake, that require additional coverage. Maintenance-related issues are typically the homeowner's responsibility. The policy may include inventory, or this can be bought as a separate policy, especially for people who rent housing. In some countries, insurers offer a package which may include liability and legal responsibility for injuries and property damage caused by members of the household, including pets.[31]

• 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 principal.

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The demand for terrorism insurance surged after 9/11• 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).

• 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 as hurricanes.

Liability[edit]Main article: Liability insuranceLiability 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.

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The subprime mortgage crisis was the source of many liability insurance losses• Public 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 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 malpractice insurance.

Credit[edit]Main article: Payment protection insuranceCredit insurance repays some or all of a loan when certain circumstances arise to the borrower such as unemployment, disability, or death.

• 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.

Other types[edit]• 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.[32] In car insurance, all-risk policy includes also the damages caused by the own driver.

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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 insurance covers the loss of income, and the expenses incurred, after a covered peril interrupts normal business operations.

• Collateral protection insurance (CPI) insures property (primarily vehicles) held as collateral for loans made by lending institutions.

• 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.

• 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.

• 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 and 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 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.

• 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[edit]• Fraternal insurance is provided on a cooperative basis by

fraternal benefit societies or other social organizations.[33]

• 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 the welfare state. This is a large, complicated topic that engenders tremendous debate, which can be further studied in the following articles (and others):

• National Insurance • Social safety net • Social security • Social Security debate (United States) • Social Security (United States) • Social welfare provision

• 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 self-insurance[edit]

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 some Muslim groups, depend on support provided by their 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 and may have disappeared altogether.Insurance companies[edit]

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Certificate issued by Republic Fire Insurance Co. of New York c. 1860Insurance companies may be classified into two groups:

• Life insurance companies, which sell life insurance, annuities and pensions products.

• Non-life or property/casualty insurance companies, which sell other types of insurance.

General insurance companies can be further divided into these sub categories.

• Standard lines • Excess lines

In most countries, life and non-life insurers are subject to different regulatory regimes and different tax and accounting rules. The main reason for the distinction between the two types of company is that life, annuity, and pension business is very long-term in nature – coverage for life assurance or a pension can cover risks over many decades. By contrast, non-life insurance cover usually covers a shorter period, such as one year.In the United States, standard line insurance companies are insurers that have received a license or authorization from a state for the purpose of writing specific kinds of insurance in that state, such as automobile insurance or homeowners' insurance.[34] They are typically referred to as "admitted" insurers. Generally, such an insurance company must submit its rates and policy forms to the state's insurance regulator to receive his or her prior approval, although whether an insurance company must receive prior approval depends upon the kind of insurance being written. Standard line insurance companies usually charge lower premiums than excess line insurers and may sell directly to individual insureds. They are regulated by state laws, which include restrictions on rates and forms, and which aim to protect consumers and the public from unfair or abusive practices.[34] These insurers also are required to contribute to state guarantee funds, which are used to pay for losses if an insurer becomes insolvent.[34]

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The subscription room at Lloyd's of London in the early 19th century.Excess line insurance companies (also known as Excess and Surplus) typically insure risks not covered by the standard lines insurance market, due to a variety of reasons (e.g., new entity or an entity that does not have an adequate loss history, an entity with unique risk characteristics, or an entity that has a loss history that does not fit the underwriting requirements of the standard lines insurance market).[34] They are typically referred to as non-admitted or unlicensed insurers.[34] Non-admitted insurers are generally not licensed or authorized in the states in which they write business, although they must be licensed or authorized in the state in which they are domiciled.[34] These companies have more flexibility and can react faster than standard line insurance companies because they are not required to file rates and forms.[34] However, they still have substantial regulatory requirements placed upon them.Most states require that excess line insurers submit financial information, articles of incorporation, a list of officers, and other general information.[34] They also may not write insurance that is typically available in the admitted market, do not participate in state guarantee funds (and therefore policyholders do not have any recourse through these funds if an insurer becomes insolvent and cannot pay claims), may pay higher taxes, only may write coverage for a risk if it has been rejected by three different admitted insurers, and only when the insurance producer placing the business has a surplus lines license.[34] Generally, when an excess line insurer writes a policy, it must, pursuant to state laws, provide disclosure to the

policyholder that the policyholder's policy is being written by an excess line insurer.[34]

On July 21, 2010, President Barack Obama signed into law the Nonadmitted and Reinsurance Reform Act of 2010 ("NRRA"), which took effect on July 21, 2011, and was part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The NRRA changed the regulatory paradigm for excess line insurance. Generally, under the NRRA, only the insured's home state may regulate and tax the excess line transaction.[35]

Insurance companies are generally classified as either mutual or proprietary companies.[36] 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.Other possible forms for an insurance company include reciprocals, in which policyholders reciprocate in sharing risks, and Lloyd's organizations.Insurance companies are rated by various agencies such as A. M. 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.Reinsurance companies are insurance companies that sell policies to other insurance companies, allowing them to reduce their risks and protect themselves from very large losses. The reinsurance market is dominated by a few very large companies, with huge reserves. A reinsurer may also be a direct writer of insurance risks as well.Captive insurance companies may be defined as limited-purpose insurance companies established with the specific objective of financing risks emanating from their parent group or groups. This definition can sometimes be extended to include some of the risks of the parent company's customers. In short, it is an in-house self-insurance vehicle. Captives may take the form of a "pure" entity (which is a 100% subsidiary of the self-insured parent company); of a

"mutual" captive (which insures the collective risks of members of an industry); and of an "association" captive (which self-insures individual risks of the members of a professional, commercial or industrial association). Captives represent commercial, economic and tax advantages to their sponsors because of the reductions in costs they help create and for the ease of insurance risk management and the flexibility for cash flows they generate. Additionally, they may provide coverage of risks which is neither available nor offered in the traditional insurance market at reasonable prices.The types of risk that a captive can underwrite for their parents include property damage, public and product liability, professional indemnity, employee benefits, employers' liability, motor and medical aid expenses. The captive's exposure to such risks may be limited by the use of reinsurance.Captives are becoming an increasingly important component of the risk management and risk financing strategy of their parent. This can be understood against the following background:

• Heavy and increasing premium costs in almost every line of coverage

• Difficulties in insuring certain types of fortuitous risk • Differential coverage standards in various parts of the world • Rating structures which reflect market trends rather than

individual loss experience• Insufficient credit for deductibles and/or loss control efforts

There are also companies known as "insurance consultants". Like a mortgage broker, these companies are paid a fee by the customer to shop around for the best insurance policy amongst many companies. Similar to an insurance consultant, an 'insurance broker' also shops around for the best insurance policy amongst many companies. However, with insurance brokers, the fee is usually paid in the form of commission from the insurer that is selected rather than directly from the client.Neither insurance consultants nor insurance brokers are insurance companies and no risks are transferred to them in insurance transactions. Third party administrators are companies that perform underwriting and sometimes claims handling services for insurance companies. These companies often have special expertise that the insurance companies do not have.

The financial stability and strength of an insurance company should be a major consideration when buying an insurance contract. An insurance premium paid currently provides coverage for losses that might arise many years in the future. For that reason, the viability of the insurance carrier is very important. In recent years, a number of insurance companies have become insolvent, leaving their policyholders with no coverage (or coverage only from a government-backed insurance pool or other arrangement with less attractive payouts for losses). A number of independent rating agencies provide information and rate the financial viability of insurance companies.Across the world[edit]

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Life insurance premiums written in 2005

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Non-life insurance premiums written in 2005Global insurance premiums grew by 2.7% in inflation-adjusted terms in 2010 to $4.3 trillion, climbing above pre-crisis levels. The return to growth and record premiums generated during the year followed two years of decline in real terms. Life insurance premiums increased by 3.2% in 2010 and non-life premiums by 2.1%. While industrialised countries saw an increase in premiums of around 1.4%, insurance markets in emerging economies saw rapid expansion with 11% growth in premium income. The global insurance industry was sufficiently capitalised to withstand the financial crisis of 2008 and 2009 and most insurance companies restored their capital to pre-crisis levels by the end of 2010. With the continuation of the gradual

recovery of the global economy, it is likely the insurance industry will continue to see growth in premium income both in industrialised countries and emerging markets in 2011.Advanced economies account for the bulk of global insurance. With premium income of $1.62 trillion, Europe was the most important region in 2010, followed by North America $1.409 trillion and Asia $1.161 trillion. Europe has however seen a decline in premium income during the year in contrast to the growth seen in North America and Asia. The top four countries generated more than a half of premiums. The United States and Japan alone accounted for 40% of world insurance, much higher than their 7% share of the global population. Emerging economies accounted for over 85% of the world's population but only around 15% of premiums. Their markets are however growing at a quicker pace.[37] The country expected to have the biggest impact on the insurance share distribution across the world is China. According to Sam Radwan of ENHANCE International LLC, low premium penetration (insurance premium as a % of GDP), an ageing population and the largest car market in terms of new sales, premium growth has averaged 15–20% in the past five years, and China is expected to be the largest insurance market in the next decade or two.[38]

Regulatory differences[edit]Main article: Insurance lawIn the United States, insurance is regulated by the states under the McCarran-Ferguson Act, with "periodic proposals for federal intervention", and a nonprofit coalition of state insurance agencies called the National Association of Insurance Commissioners works to harmonize the country's different laws and regulations.[39] The National Conference of Insurance Legislators (NCOIL) also works to harmonize the different state laws.[40]

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.[41] As far as insurance in the United Kingdom, the Financial Services Authority took over insurance regulation from the General Insurance Standards Council

in 2005;[42] laws passed include the Insurance Companies Act 1973 and another in 1982,[43] and reforms to warranty and other aspects under discussion as of 2012.[44]

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[45] 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.[46]

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.Controversies[edit] Insurance insulates too much[edit]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. To reduce their own financial exposure, insurance companies have contractual clauses that mitigate their obligation to provide coverage if the insured engages in behavior that grossly magnifies their risk of loss or liability.[citation needed]

For example, life insurance companies may require higher premiums or deny coverage altogether to people who work in hazardous occupations or engage in dangerous sports. Liability insurance providers do not provide coverage for liability arising from intentional torts committed by or at the direction of the insured. Even if a provider desired to provide such coverage, it is against the public policy of most countries to allow such insurance to exist, and thus it is usually illegal.[citation needed]

Complexity of insurance policy contracts[edit]

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9/11 was a major insurance loss, but there were disputes over the World Trade Center's insurance policyInsurance 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 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 towards encouraging an insured to purchase more insurance than might be necessary at a higher price. A broker generally holds

contracts with many insurers, thereby allowing the broker to "shop" the market for the best rates and coverage possible.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 sales 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 and/or agents. However, such a consultant must still work through brokers and/or agents in order to secure coverage for their clients.Limited consumer benefits[edit]In United States, economists and consumer advocates generally consider insurance to be worthwhile for low-probability, catastrophic losses, but not for high-probability, small losses. Because of this, consumers are advised to select high deductibles and to not insure losses which would not cause a disruption in their life. However, consumers have shown a tendency to prefer low deductibles and to prefer to insure relatively high-probability, small losses over low-probability, perhaps due to not understanding or ignoring the low-probability risk. This is associated with reduced purchasing of insurance against low-probability losses, and may result in increased inefficiencies from moral hazard.[47]

Redlining[edit]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.[48]

In July 2007, The 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.[49] The report was disputed by representatives of the Consumer Federation of America, the National Fair Housing Alliance, the National Consumer Law Center, and the Center for Economic Justice, for relying on data provided by the insurance industry.[50]

All states have provisions in their rate regulation laws or in their fair trade practice acts that prohibit unfair discrimination, often called redlining, in setting rates and making insurance available.[51]

In determining premiums and premium rate structures, insurers consider quantifiable factors, including location, credit scores, gender, occupation, marital status, and education level. However, the use of such factors is often considered to be unfair or unlawfully discriminatory, and the reaction against this practice has in some instances led to political disputes about the ways in which insurers determine premiums and regulatory intervention to limit the factors used.An insurance underwriter's job is to evaluate a given risk as to the likelihood that a loss will occur. Any factor that causes a greater likelihood of loss should theoretically be charged a higher rate. This basic principle of insurance must be followed if insurance companies are to remain solvent.[citation needed] Thus, "discrimination" against (i.e., negative differential treatment of) potential insureds in the risk evaluation and premium-setting process is a necessary by-product of the fundamentals of insurance underwriting. For instance, insurers charge older people significantly higher premiums than they charge younger people for term life insurance. Older people are thus treated

differently from younger people (i.e., a distinction is made, discrimination occurs). The rationale for the differential treatment goes to the heart of the risk a life insurer takes: Old people are likely to die sooner than young people, so the risk of loss (the insured's death) is greater in any given period of time and therefore the risk premium must be higher to cover the greater risk. However, treating insureds differently when there is no actuarially sound reason for doing so is unlawful discrimination.Insurance patents[edit]Further information: Insurance patentNew 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 auto insurance. Early versions were independently invented and patented by a major US auto insurance company, Progressive Auto Insurance (U.S. Patent 5,797,134) and a Spanish independent inventor, Salvador Minguijon Perez (EP 0700009).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.

Insurance From Wikipedia, the free encyclopedia

Jump to: navigation, searchThis article is about the risk management method. For insurance in blackjack, see Blackjack.

Financial market participants

�• Credit unions Insurance companies Investment banks Investment funds

Pension funds Prime brokers Trusts• Finance Financial market Participants Corporate finance Personal finance

Public finance Banks and banking Financial regulation• v t e

Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange for payment. It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. An insurer, or insurance carrier, is a company selling the insurance; the insured, or policyholder, is the person or entity buying the insurance policy. The amount of money to be charged for a certain amount of insurance coverage is called the premium. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice.The 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 (indemnify) the insured in the case of a financial (personal) loss. The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insured will be financially compensated.

Contents  [hide] 1 History

1.1 Early methods 1.2 Modern insurance

2 Principles 2.1 Insurability 2.2 Legal 2.3 Indemnification

3 Societal effects 3.1 Methods of insurance

4 Insurers' business model 4.1 Underwriting and investing 4.2 Claims 4.3 Marketing

5 Types of insurance 5.1 Auto insurance

5.1.1 Gap insurance 5.2 Health insurance 5.3 Accident, sickness, and unemployment insurance 5.4 Casualty 5.5 Life

5.5.1 Burial insurance 5.6 Property 5.7 Liability 5.8 Credit 5.9 Other types 5.10 Insurance financing vehicles 5.11 Closed community self-insurance

6 Insurance companies 7 Across the world

7.1 Regulatory differences 8 Controversies

8.1 Insurance insulates too much 8.2 Complexity of insurance policy contracts 8.3 Limited consumer benefits 8.4 Redlining 8.5 Insurance patents 8.6 The insurance industry and rent-seeking 8.7 Religious concerns

9 See also 10 Notes 11 Bibliography 12 External links

History[edit] Main article: History of insuranceEarly methods[edit]

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Merchants have sought methods to minimize risks since early times. Pictured, Governors of the Wine Merchant's Guild by Ferdinand Bol, c. 1680.

Methods for transferring or distributing risk were practiced by Chinese and Babylonian traders as long ago as the 3rd and 2nd millennia BC, respectively.[1] Chinese merchants travelling treacherous river rapids would redistribute their wares across many vessels to limit the loss due to any single vessel's capsizing. The Babylonians developed a system which was recorded in the famous Code of Hammurabi, c. 1750 BC, and practiced by early Mediterranean sailing merchants. If a merchant received a loan to fund his shipment, he would pay the lender an additional sum in exchange for the lender's guarantee to cancel the loan should the shipment be stolen or lost at sea.At some point in the 1st millennium BC, the inhabitants of Rhodes created the 'general average'. This allowed groups of merchants to pay to insure their goods being shipped together. The collected premiums would be used to reimburse any merchant whose goods were jettisoned during transport, whether to storm or sinkage.[2]

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[edit]Insurance became far more sophisticated in Enlightenment era Europe, and specialized varieties developed.

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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".[4] 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.[5]

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 centre 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.[6]

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Leaflet promoting the National Insurance Act 1911.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.[7][8] Edward Rowe Mores established the Society for Equitable Assurances on Lives and Survivorship in 1762.It was the world's first mutual insurer and it pioneered age based premiums based on mortality rate laying "the framework for scientific insurance practice and development" and "the basis of modern life assurance upon which all life assurance schemes were subsequently based".[9]

In the late 19th century, "accident insurance" began to become available. This operated much like modern disability insurance.[10][11] The first company to offer accident insurance was the Railway Passengers Assurance Company, formed in 1848 in England to insure against the rising number of fatalities on the nascent railway system.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.[12][13] In Britain more extensive legislation was introduced by the Liberal government in the 1911 National Insurance Act. This gave the British working classes the first contributory system of insurance against illness and unemployment.[14] This system was greatly expanded after the Second World War under the influence of the Beveridge Report, to form the first modern welfare state.[12][15]

Principles[edit] 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 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.[16]

Insurability[edit]Main article: InsurabilityRisk which can be insured by private companies typically shares seven common characteristics:[17]

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. Capital constrains 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[edit]When a company insures an individual entity, there are basic legal requirements and regulations. Several commonly cited legal principles of insurance include:[18]

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[edit]Main article: IndemnityTo "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[19] 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.[19][20]

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.Societal effects[edit] 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

moral hazard to refer to increased risk due to intentional carelessness or indifference.[21] 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.[22]

Methods of insurance[edit]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

coverage3 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

Insurers' business model[edit]

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Accidents will happen (William H. Watson, 1922) is a slapstick silent film about the methods and mishaps of an insurance broker. Collection EYE Film Institute Netherlands.Underwriting and investing[edit]

The business model is to collect more in premium and investment income than is paid out in losses, and to also offer a competitive price which consumers will accept. Profit can be reduced to a simple equation:Profit = earned premium + investment income – incurred loss – underwriting expenses.Insurers make money in two ways:

• Through underwriting, the process by which insurers select the risks to insure and decide how much in premiums to charge for accepting those risks

• By investing the premiums they collect from insured parties The most complicated aspect of the insurance business is the actuarial science of ratemaking (price-setting) of policies, which uses statistics and probability to approximate the rate of future claims based on a given risk. After producing rates, the insurer will use discretion to reject or accept risks through the underwriting process.At the most basic level, initial ratemaking involves looking at the frequency and severity of insured perils and the expected average payout resulting from these perils. Thereafter an insurance company will collect historical loss data, bring the loss data to present value, and compare these prior losses to the premium collected in order to assess rate adequacy.[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. The Association of British Insurers (gathering 400 insurance companies and 94% of UK insurance services) has almost 20% of the investments in the London Stock Exchange.[25]

In the United States, the underwriting loss of property and casualty insurance companies was $142.3 billion in the five years ending 2003. But overall profit for the same period was $68.4 billion, as the result of float. Some insurance industry insiders, most notably 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 depressed period. Bear markets do cause insurers to shift away from investments and to toughen up their underwriting standards, so a poor economy generally means high insurance premiums. This tendency to swing between profitable and unprofitable periods over time is commonly known as the underwriting, or insurance, cycle.[26]

Claims[edit]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[edit]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.[27]

Types of insurance[edit] 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 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.[28]

Auto insurance[edit]Main article: Vehicle insurance

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A wrecked vehicle in CopenhagenAuto 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[edit]Main article: Gap insuranceGap 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 companies 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 your finance company when you first purchase your vehicle. Most auto insurance companies offer this coverage to consumers as well. If you are unsure if GAP coverage had been purchased, you should check your vehicle lease or purchase documentation.Health insurance[edit]Main articles: Health insurance and Dental insurance

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Great Western Hospital, SwindonHealth 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.Accident, sickness, and unemployment insurance[edit]

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Workers' compensation, or employers' liability insurance, is compulsory in some countries

• Disability insurance policies provide financial support in the event of the policyholder becoming unable to work because of disabling illness or injury. It provides monthly support to help pay such obligations as mortgage loans and credit cards. Short-term and long-term disability policies are available to individuals, but considering the expense, long-term policies are generally obtained only by those with at least six-figure incomes, such as doctors, lawyers, etc. Short-term disability insurance covers a person for a period typically up to six months, paying a stipend each month to cover medical bills and other necessities.

• Long-term disability insurance covers an individual's expenses for the long term, up until such time as they are considered permanently disabled and thereafter. 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 wages lost and accompanying medical expenses incurred because of a job-related injury.

Casualty[edit]Main article: Casualty insuranceCasualty 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.

• 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 political conditions could result in a loss.

Life[edit]Main article: Life insurance

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Amicable Society for a Perpetual Assurance Office, Serjeants' Inn, Fleet Street, London, 1801

Life insurance provides a monetary benefit to a decedent's family or other designated beneficiary, and may specifically provide for income to an insured person's family, burial, funeral and other final expenses. Life insurance policies often allow the option of having the proceeds paid to the beneficiary either in a lump sum cash payment or an annuity. In most states, a person cannot purchase a policy on another person without their knowledge.Annuities provide a stream of payments and are generally classified as insurance because they are issued by insurance companies, are regulated as insurance, and require the same kinds of actuarial and investment management expertise that life insurance requires. Annuities and pensions that pay a benefit for life are sometimes regarded as insurance against the possibility that a retiree will outlive his or her financial resources. In that sense, they are the complement of life insurance and, from an underwriting perspective, are the mirror image of life insurance.Certain life insurance contracts accumulate cash values, which may be taken by the insured if the policy is surrendered or which may be borrowed against. Some policies, such as annuities and endowment policies, are financial instruments to accumulate or liquidate wealth when it is needed.In many countries, such as the 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[edit]Burial insurance is a very old type of life insurance which is paid out upon death to cover final expenses, such as the cost of a funeral. The Greeks and Romans introduced burial insurance c. 600 CE when they organized guilds called "benevolent societies" which cared for

the surviving families and paid funeral expenses of members upon death. Guilds in the Middle Ages served a similar purpose, as did friendly societies during Victorian times.Property[edit]Main article: Property insurance

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This tornado damage to an Illinois home would be considered an "Act of God" for insurance purposes

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:

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US Airways Flight 1549 was written off after ditching into the Hudson River• Aviation insurance protects aircraft hulls and spares, and

associated liability risks, such as passenger and third-party liability. Airports may also appear under this subcategory, including air traffic control and refuelling operations for international airports through to smaller domestic exposures.

• Boiler insurance (also known as boiler and machinery insurance, or equipment breakdown insurance) insures against accidental physical damage to boilers, equipment or machinery.

• Builder's risk insurance insures against the risk of physical loss or damage to property during construction. Builder's risk insurance is typically written on an "all risk" basis covering damage arising from any cause (including the negligence of the insured) not otherwise expressly excluded. Builder's risk insurance is coverage that protects a person's or organization's insurable interest in materials, fixtures 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.[29]

• 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.[30]

• 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.

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Hurricane Katrina caused over $80 billion of storm and flood damage• Flood insurance protects against property loss due to flooding.

Many U.S. insurers do not provide flood insurance in some parts of the country. In response to this, the federal government created the National Flood Insurance Program which serves as the insurer of last resort.

• Home insurance, also commonly called hazard insurance or homeowners insurance (often abbreviated in the real estate industry as HOI), provides coverage for damage or destruction of the policyholder's home. In some geographical areas, the policy may exclude certain types of risks, such as flood or earthquake, that require additional coverage. Maintenance-related issues are typically the homeowner's responsibility. The policy may include inventory, or this can be bought as a separate policy, especially for people who rent housing. In some countries, insurers offer a package which may include liability and legal responsibility for injuries and property damage caused by members of the household, including pets.[31]

• 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 principal.

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The demand for terrorism insurance surged after 9/11• 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).

• 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 as hurricanes.

Liability[edit]Main article: Liability insuranceLiability 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.

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The subprime mortgage crisis was the source of many liability insurance losses• Public 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 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 malpractice insurance.

Credit[edit]Main article: Payment protection insuranceCredit insurance repays some or all of a loan when certain circumstances arise to the borrower such as unemployment, disability, or death.

• 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.

Other types[edit]• 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.[32] In car insurance, all-risk policy includes also the damages caused by the own driver.

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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 insurance covers the loss of income, and the expenses incurred, after a covered peril interrupts normal business operations.

• Collateral protection insurance (CPI) insures property (primarily vehicles) held as collateral for loans made by lending institutions.

• 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.

• 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.

• 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 and 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 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.

• 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[edit]• Fraternal insurance is provided on a cooperative basis by

fraternal benefit societies or other social organizations.[33]

• 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 the welfare state. This is a large, complicated topic that engenders tremendous debate, which can be further studied in the following articles (and others):

• National Insurance • Social safety net • Social security • Social Security debate (United States) • Social Security (United States) • Social welfare provision

• 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 self-insurance[edit]

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 some Muslim groups, depend on support provided by their 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 and may have disappeared altogether.Insurance companies[edit]

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Certificate issued by Republic Fire Insurance Co. of New York c. 1860Insurance companies may be classified into two groups:

• Life insurance companies, which sell life insurance, annuities and pensions products.

• Non-life or property/casualty insurance companies, which sell other types of insurance.

General insurance companies can be further divided into these sub categories.

• Standard lines • Excess lines

In most countries, life and non-life insurers are subject to different regulatory regimes and different tax and accounting rules. The main reason for the distinction between the two types of company is that life, annuity, and pension business is very long-term in nature – coverage for life assurance or a pension can cover risks over many decades. By contrast, non-life insurance cover usually covers a shorter period, such as one year.In the United States, standard line insurance companies are insurers that have received a license or authorization from a state for the purpose of writing specific kinds of insurance in that state, such as automobile insurance or homeowners' insurance.[34] They are typically referred to as "admitted" insurers. Generally, such an insurance company must submit its rates and policy forms to the state's insurance regulator to receive his or her prior approval, although whether an insurance company must receive prior approval depends upon the kind of insurance being written. Standard line insurance companies usually charge lower premiums than excess line insurers and may sell directly to individual insureds. They are regulated by state laws, which include restrictions on rates and forms, and which aim to protect consumers and the public from unfair or abusive practices.[34] These insurers also are required to contribute to state guarantee funds, which are used to pay for losses if an insurer becomes insolvent.[34]

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The subscription room at Lloyd's of London in the early 19th century.Excess line insurance companies (also known as Excess and Surplus) typically insure risks not covered by the standard lines insurance market, due to a variety of reasons (e.g., new entity or an entity that does not have an adequate loss history, an entity with unique risk characteristics, or an entity that has a loss history that does not fit the underwriting requirements of the standard lines insurance market).[34] They are typically referred to as non-admitted or unlicensed insurers.[34] Non-admitted insurers are generally not licensed or authorized in the states in which they write business, although they must be licensed or authorized in the state in which they are domiciled.[34] These companies have more flexibility and can react faster than standard line insurance companies because they are not required to file rates and forms.[34] However, they still have substantial regulatory requirements placed upon them.Most states require that excess line insurers submit financial information, articles of incorporation, a list of officers, and other general information.[34] They also may not write insurance that is typically available in the admitted market, do not participate in state guarantee funds (and therefore policyholders do not have any recourse through these funds if an insurer becomes insolvent and cannot pay claims), may pay higher taxes, only may write coverage for a risk if it has been rejected by three different admitted insurers, and only when the insurance producer placing the business has a surplus lines license.[34] Generally, when an excess line insurer writes a policy, it must, pursuant to state laws, provide disclosure to the

policyholder that the policyholder's policy is being written by an excess line insurer.[34]

On July 21, 2010, President Barack Obama signed into law the Nonadmitted and Reinsurance Reform Act of 2010 ("NRRA"), which took effect on July 21, 2011, and was part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The NRRA changed the regulatory paradigm for excess line insurance. Generally, under the NRRA, only the insured's home state may regulate and tax the excess line transaction.[35]

Insurance companies are generally classified as either mutual or proprietary companies.[36] 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.Other possible forms for an insurance company include reciprocals, in which policyholders reciprocate in sharing risks, and Lloyd's organizations.Insurance companies are rated by various agencies such as A. M. 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.Reinsurance companies are insurance companies that sell policies to other insurance companies, allowing them to reduce their risks and protect themselves from very large losses. The reinsurance market is dominated by a few very large companies, with huge reserves. A reinsurer may also be a direct writer of insurance risks as well.Captive insurance companies may be defined as limited-purpose insurance companies established with the specific objective of financing risks emanating from their parent group or groups. This definition can sometimes be extended to include some of the risks of the parent company's customers. In short, it is an in-house self-insurance vehicle. Captives may take the form of a "pure" entity (which is a 100% subsidiary of the self-insured parent company); of a

"mutual" captive (which insures the collective risks of members of an industry); and of an "association" captive (which self-insures individual risks of the members of a professional, commercial or industrial association). Captives represent commercial, economic and tax advantages to their sponsors because of the reductions in costs they help create and for the ease of insurance risk management and the flexibility for cash flows they generate. Additionally, they may provide coverage of risks which is neither available nor offered in the traditional insurance market at reasonable prices.The types of risk that a captive can underwrite for their parents include property damage, public and product liability, professional indemnity, employee benefits, employers' liability, motor and medical aid expenses. The captive's exposure to such risks may be limited by the use of reinsurance.Captives are becoming an increasingly important component of the risk management and risk financing strategy of their parent. This can be understood against the following background:

• Heavy and increasing premium costs in almost every line of coverage

• Difficulties in insuring certain types of fortuitous risk • Differential coverage standards in various parts of the world • Rating structures which reflect market trends rather than

individual loss experience• Insufficient credit for deductibles and/or loss control efforts

There are also companies known as "insurance consultants". Like a mortgage broker, these companies are paid a fee by the customer to shop around for the best insurance policy amongst many companies. Similar to an insurance consultant, an 'insurance broker' also shops around for the best insurance policy amongst many companies. However, with insurance brokers, the fee is usually paid in the form of commission from the insurer that is selected rather than directly from the client.Neither insurance consultants nor insurance brokers are insurance companies and no risks are transferred to them in insurance transactions. Third party administrators are companies that perform underwriting and sometimes claims handling services for insurance companies. These companies often have special expertise that the insurance companies do not have.

The financial stability and strength of an insurance company should be a major consideration when buying an insurance contract. An insurance premium paid currently provides coverage for losses that might arise many years in the future. For that reason, the viability of the insurance carrier is very important. In recent years, a number of insurance companies have become insolvent, leaving their policyholders with no coverage (or coverage only from a government-backed insurance pool or other arrangement with less attractive payouts for losses). A number of independent rating agencies provide information and rate the financial viability of insurance companies.Across the world[edit]

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Life insurance premiums written in 2005

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Non-life insurance premiums written in 2005Global insurance premiums grew by 2.7% in inflation-adjusted terms in 2010 to $4.3 trillion, climbing above pre-crisis levels. The return to growth and record premiums generated during the year followed two years of decline in real terms. Life insurance premiums increased by 3.2% in 2010 and non-life premiums by 2.1%. While industrialised countries saw an increase in premiums of around 1.4%, insurance markets in emerging economies saw rapid expansion with 11% growth in premium income. The global insurance industry was sufficiently capitalised to withstand the financial crisis of 2008 and 2009 and most insurance companies restored their capital to pre-crisis levels by the end of 2010. With the continuation of the gradual

recovery of the global economy, it is likely the insurance industry will continue to see growth in premium income both in industrialised countries and emerging markets in 2011.Advanced economies account for the bulk of global insurance. With premium income of $1.62 trillion, Europe was the most important region in 2010, followed by North America $1.409 trillion and Asia $1.161 trillion. Europe has however seen a decline in premium income during the year in contrast to the growth seen in North America and Asia. The top four countries generated more than a half of premiums. The United States and Japan alone accounted for 40% of world insurance, much higher than their 7% share of the global population. Emerging economies accounted for over 85% of the world's population but only around 15% of premiums. Their markets are however growing at a quicker pace.[37] The country expected to have the biggest impact on the insurance share distribution across the world is China. According to Sam Radwan of ENHANCE International LLC, low premium penetration (insurance premium as a % of GDP), an ageing population and the largest car market in terms of new sales, premium growth has averaged 15–20% in the past five years, and China is expected to be the largest insurance market in the next decade or two.[38]

Regulatory differences[edit]Main article: Insurance lawIn the United States, insurance is regulated by the states under the McCarran-Ferguson Act, with "periodic proposals for federal intervention", and a nonprofit coalition of state insurance agencies called the National Association of Insurance Commissioners works to harmonize the country's different laws and regulations.[39] The National Conference of Insurance Legislators (NCOIL) also works to harmonize the different state laws.[40]

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.[41] As far as insurance in the United Kingdom, the Financial Services Authority took over insurance regulation from the General Insurance Standards Council

in 2005;[42] laws passed include the Insurance Companies Act 1973 and another in 1982,[43] and reforms to warranty and other aspects under discussion as of 2012.[44]

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[45] 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.[46]

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.Controversies[edit] Insurance insulates too much[edit]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. To reduce their own financial exposure, insurance companies have contractual clauses that mitigate their obligation to provide coverage if the insured engages in behavior that grossly magnifies their risk of loss or liability.[citation needed]

For example, life insurance companies may require higher premiums or deny coverage altogether to people who work in hazardous occupations or engage in dangerous sports. Liability insurance providers do not provide coverage for liability arising from intentional torts committed by or at the direction of the insured. Even if a provider desired to provide such coverage, it is against the public policy of most countries to allow such insurance to exist, and thus it is usually illegal.[citation needed]

Complexity of insurance policy contracts[edit]

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9/11 was a major insurance loss, but there were disputes over the World Trade Center's insurance policyInsurance 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 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 towards encouraging an insured to purchase more insurance than might be necessary at a higher price. A broker generally holds

contracts with many insurers, thereby allowing the broker to "shop" the market for the best rates and coverage possible.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 sales 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 and/or agents. However, such a consultant must still work through brokers and/or agents in order to secure coverage for their clients.Limited consumer benefits[edit]In United States, economists and consumer advocates generally consider insurance to be worthwhile for low-probability, catastrophic losses, but not for high-probability, small losses. Because of this, consumers are advised to select high deductibles and to not insure losses which would not cause a disruption in their life. However, consumers have shown a tendency to prefer low deductibles and to prefer to insure relatively high-probability, small losses over low-probability, perhaps due to not understanding or ignoring the low-probability risk. This is associated with reduced purchasing of insurance against low-probability losses, and may result in increased inefficiencies from moral hazard.[47]

Redlining[edit]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.[48]

In July 2007, The 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.[49] The report was disputed by representatives of the Consumer Federation of America, the National Fair Housing Alliance, the National Consumer Law Center, and the Center for Economic Justice, for relying on data provided by the insurance industry.[50]

All states have provisions in their rate regulation laws or in their fair trade practice acts that prohibit unfair discrimination, often called redlining, in setting rates and making insurance available.[51]

In determining premiums and premium rate structures, insurers consider quantifiable factors, including location, credit scores, gender, occupation, marital status, and education level. However, the use of such factors is often considered to be unfair or unlawfully discriminatory, and the reaction against this practice has in some instances led to political disputes about the ways in which insurers determine premiums and regulatory intervention to limit the factors used.An insurance underwriter's job is to evaluate a given risk as to the likelihood that a loss will occur. Any factor that causes a greater likelihood of loss should theoretically be charged a higher rate. This basic principle of insurance must be followed if insurance companies are to remain solvent.[citation needed] Thus, "discrimination" against (i.e., negative differential treatment of) potential insureds in the risk evaluation and premium-setting process is a necessary by-product of the fundamentals of insurance underwriting. For instance, insurers charge older people significantly higher premiums than they charge younger people for term life insurance. Older people are thus treated

differently from younger people (i.e., a distinction is made, discrimination occurs). The rationale for the differential treatment goes to the heart of the risk a life insurer takes: Old people are likely to die sooner than young people, so the risk of loss (the insured's death) is greater in any given period of time and therefore the risk premium must be higher to cover the greater risk. However, treating insureds differently when there is no actuarially sound reason for doing so is unlawful discrimination.Insurance patents[edit]Further information: Insurance patentNew 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 auto insurance. Early versions were independently invented and patented by a major US auto insurance c

Insurance From Wikipedia, the free encyclopedia

Jump to: navigation, searchThis article is about the risk management method. For insurance in blackjack, see Blackjack.

Financial market participants

�• Credit unions Insurance companies Investment banks Investment funds

Pension funds Prime brokers Trusts• Finance Financial market Participants Corporate finance Personal finance

Public finance Banks and banking Financial regulation• v t e

Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange for payment. It is a form of risk management primarily used to hedge against the risk of a contingent,

uncertain loss. An insurer, or insurance carrier, is a company selling the insurance; the insured, or policyholder, is the person or entity buying the insurance policy. The amount of money to be charged for a certain amount of insurance coverage is called the premium. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice.The 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 (indemnify) the insured in the case of a financial (personal) loss. The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insured will be financially compensated.

Contents  [hide] 1 History

1.1 Early methods 1.2 Modern insurance

2 Principles 2.1 Insurability 2.2 Legal 2.3 Indemnification

3 Societal effects 3.1 Methods of insurance

4 Insurers' business model 4.1 Underwriting and investing 4.2 Claims 4.3 Marketing

5 Types of insurance 5.1 Auto insurance

5.1.1 Gap insurance 5.2 Health insurance 5.3 Accident, sickness, and unemployment insurance 5.4 Casualty 5.5 Life

5.5.1 Burial insurance 5.6 Property 5.7 Liability 5.8 Credit

5.9 Other types 5.10 Insurance financing vehicles 5.11 Closed community self-insurance

6 Insurance companies 7 Across the world

7.1 Regulatory differences 8 Controversies

8.1 Insurance insulates too much 8.2 Complexity of insurance policy contracts 8.3 Limited consumer benefits 8.4 Redlining 8.5 Insurance patents 8.6 The insurance industry and rent-seeking 8.7 Religious concerns

9 See also 10 Notes 11 Bibliography 12 External links

History[edit] Main article: History of insuranceEarly methods[edit]

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Merchants have sought methods to minimize risks since early times. Pictured, Governors of the Wine Merchant's Guild by Ferdinand Bol, c. 1680.

Methods for transferring or distributing risk were practiced by Chinese and Babylonian traders as long ago as the 3rd and 2nd millennia BC, respectively.[1] Chinese merchants travelling treacherous river rapids would redistribute their wares across many vessels to limit the loss due to any single vessel's capsizing. The Babylonians developed a system which was recorded in the famous Code of Hammurabi, c.

1750 BC, and practiced by early Mediterranean sailing merchants. If a merchant received a loan to fund his shipment, he would pay the lender an additional sum in exchange for the lender's guarantee to cancel the loan should the shipment be stolen or lost at sea.At some point in the 1st millennium BC, the inhabitants of Rhodes created the 'general average'. This allowed groups of merchants to pay to insure their goods being shipped together. The collected premiums would be used to reimburse any merchant whose goods were jettisoned during transport, whether to storm or sinkage.[2]

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[edit]Insurance became far more sophisticated in Enlightenment era Europe, and specialized varieties developed.

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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".[4] 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.[5]

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 centre 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.[6]

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Leaflet promoting the National Insurance Act 1911.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.[7][8] Edward Rowe Mores established the Society for Equitable Assurances on Lives and Survivorship in 1762.It was the world's first mutual insurer and it pioneered age based premiums based on mortality rate laying "the framework for scientific insurance practice and development" and "the basis of modern life assurance upon which all life assurance schemes were subsequently based".[9]

In the late 19th century, "accident insurance" began to become available. This operated much like modern disability insurance.[10][11] The first company to offer accident insurance was the Railway Passengers Assurance Company, formed in 1848 in England to insure against the rising number of fatalities on the nascent railway system.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.[12][13] In Britain more extensive legislation was introduced by the Liberal government in the 1911 National Insurance Act. This gave the British working classes the first contributory system of insurance against illness and unemployment.[14] This system was greatly expanded after the Second World War under the influence of the Beveridge Report, to form the first modern welfare state.[12][15]

Principles[edit] 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 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.[16]

Insurability[edit]Main article: InsurabilityRisk which can be insured by private companies typically shares seven common characteristics:[17]

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. Capital constrains 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[edit]When a company insures an individual entity, there are basic legal requirements and regulations. Several commonly cited legal principles of insurance include:[18]

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[edit]Main article: IndemnityTo "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[19] 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.[19][20]

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.Societal effects[edit] 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 moral hazard to refer to increased risk due to intentional carelessness or indifference.[21] 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.[22]

Methods of insurance[edit]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

coverage3 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

Insurers' business model[edit]

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Accidents will happen (William H. Watson, 1922) is a slapstick silent film about the methods and mishaps of an insurance broker. Collection EYE Film Institute Netherlands.Underwriting and investing[edit]The business model is to collect more in premium and investment income than is paid out in losses, and to also offer a competitive price which consumers will accept. Profit can be reduced to a simple equation:Profit = earned premium + investment income – incurred loss – underwriting expenses.Insurers make money in two ways:

• Through underwriting, the process by which insurers select the risks to insure and decide how much in premiums to charge for accepting those risks

• By investing the premiums they collect from insured parties The most complicated aspect of the insurance business is the actuarial science of ratemaking (price-setting) of policies, which uses statistics and probability to approximate the rate of future claims based on a given risk. After producing rates, the insurer will use discretion to reject or accept risks through the underwriting process.At the most basic level, initial ratemaking involves looking at the frequency and severity of insured perils and the expected average payout resulting from these perils. Thereafter an insurance company will collect historical loss data, bring the loss data to present value, and compare these prior losses to the premium collected in order to

assess rate adequacy.[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. The Association of British Insurers (gathering 400 insurance companies and 94% of UK insurance services) has almost 20% of the investments in the London Stock Exchange.[25]

In the United States, the underwriting loss of property and casualty insurance companies was $142.3 billion in the five years ending 2003. But overall profit for the same period was $68.4 billion, as the result of float. Some insurance industry insiders, most notably 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 depressed period. Bear markets do cause insurers to shift away from investments and to toughen up their underwriting standards, so a poor economy generally means high insurance premiums. This tendency to swing between profitable and unprofitable periods over time is commonly known as the underwriting, or insurance, cycle.[26]

Claims[edit]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[edit]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.[27]

Types of insurance[edit] 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 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.[28]

Auto insurance[edit]Main article: Vehicle insurance

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A wrecked vehicle in CopenhagenAuto 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[edit]Main article: Gap insuranceGap 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 companies 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 your finance company when you first purchase your vehicle. Most auto insurance companies offer this coverage to consumers as well. If you are unsure if GAP coverage had been purchased, you should check your vehicle lease or purchase documentation.Health insurance[edit]Main articles: Health insurance and Dental insurance

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Great Western Hospital, SwindonHealth 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.Accident, sickness, and unemployment insurance[edit]

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Workers' compensation, or employers' liability insurance, is compulsory in some countries

• Disability insurance policies provide financial support in the event of the policyholder becoming unable to work because of disabling illness or injury. It provides monthly support to help pay such obligations as mortgage loans and credit cards. Short-term and long-term disability policies are available to individuals, but considering the expense, long-term policies are generally obtained only by those with at least six-figure incomes, such as doctors, lawyers, etc. Short-term disability insurance covers a person for a period typically up to six months, paying a stipend each month to cover medical bills and other necessities.

• Long-term disability insurance covers an individual's expenses for the long term, up until such time as they are considered permanently disabled and thereafter. 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 wages lost and accompanying medical expenses incurred because of a job-related injury.

Casualty[edit]Main article: Casualty insuranceCasualty 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.

• 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 political conditions could result in a loss.

Life[edit]Main article: Life insurance

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Amicable Society for a Perpetual Assurance Office, Serjeants' Inn, Fleet Street, London, 1801Life insurance provides a monetary benefit to a decedent's family or other designated beneficiary, and may specifically provide for income to an insured person's family, burial, funeral and other final expenses. Life insurance policies often allow the option of having the proceeds paid to the beneficiary either in a lump sum cash payment or an annuity. In most states, a person cannot purchase a policy on another person without their knowledge.Annuities provide a stream of payments and are generally classified as insurance because they are issued by insurance companies, are regulated as insurance, and require the same kinds of actuarial and investment management expertise that life insurance requires. Annuities and pensions that pay a benefit for life are sometimes regarded as insurance against the possibility that a retiree will outlive his or her financial resources. In that sense, they are the complement of life insurance and, from an underwriting perspective, are the mirror image of life insurance.Certain life insurance contracts accumulate cash values, which may be taken by the insured if the policy is surrendered or which may be borrowed against. Some policies, such as annuities and endowment

policies, are financial instruments to accumulate or liquidate wealth when it is needed.In many countries, such as the 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[edit]Burial insurance is a very old type of life insurance which is paid out upon death to cover final expenses, such as the cost of a funeral. The Greeks and Romans introduced burial insurance c. 600 CE when they organized guilds called "benevolent societies" which cared for the surviving families and paid funeral expenses of members upon death. Guilds in the Middle Ages served a similar purpose, as did friendly societies during Victorian times.Property[edit]Main article: Property insurance

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This tornado damage to an Illinois home would be considered an "Act of God" for insurance purposes

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:

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US Airways Flight 1549 was written off after ditching into the Hudson River• Aviation insurance protects aircraft hulls and spares, and

associated liability risks, such as passenger and third-party liability. Airports may also appear under this subcategory, including air traffic control and refuelling operations for international airports through to smaller domestic exposures.

• Boiler insurance (also known as boiler and machinery insurance, or equipment breakdown insurance) insures against accidental physical damage to boilers, equipment or machinery.

• Builder's risk insurance insures against the risk of physical loss or damage to property during construction. Builder's risk insurance is typically written on an "all risk" basis covering damage arising from any cause (including the negligence of the insured) not otherwise expressly excluded. Builder's risk insurance is coverage that protects a person's or organization's insurable interest in materials, fixtures 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.[29]

• 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.[30]

• 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.

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Hurricane Katrina caused over $80 billion of storm and flood damage• Flood insurance protects against property loss due to flooding.

Many U.S. insurers do not provide flood insurance in some parts of the country. In response to this, the federal government created the National Flood Insurance Program which serves as the insurer of last resort.

• Home insurance, also commonly called hazard insurance or homeowners insurance (often abbreviated in the real estate industry as HOI), provides coverage for damage or destruction of the policyholder's home. In some geographical areas, the policy may exclude certain types of risks, such as flood or earthquake, that require additional coverage. Maintenance-related issues are typically the homeowner's responsibility. The policy may include inventory, or this can be bought as a separate policy, especially for people who rent housing. In some countries, insurers offer a package which may include liability and legal responsibility for injuries and property damage caused by members of the household, including pets.[31]

• 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 principal.

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The demand for terrorism insurance surged after 9/11• 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).

• 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 as hurricanes.

Liability[edit]Main article: Liability insuranceLiability 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.

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The subprime mortgage crisis was the source of many liability insurance losses• Public 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 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 malpractice insurance.

Credit[edit]Main article: Payment protection insuranceCredit insurance repays some or all of a loan when certain circumstances arise to the borrower such as unemployment, disability, or death.

• 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.

Other types[edit]• 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.[32] In car insurance, all-risk policy includes also the damages caused by the own driver.

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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 insurance covers the loss of income, and the expenses incurred, after a covered peril interrupts normal business operations.

• Collateral protection insurance (CPI) insures property (primarily vehicles) held as collateral for loans made by lending institutions.

• 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.

• 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.

• 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 and 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 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.

• 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[edit]• Fraternal insurance is provided on a cooperative basis by

fraternal benefit societies or other social organizations.[33]

• 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 the welfare state. This is a large, complicated topic that engenders tremendous debate, which can be further studied in the following articles (and others):

• National Insurance • Social safety net • Social security • Social Security debate (United States) • Social Security (United States) • Social welfare provision

• 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 self-insurance[edit]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 some Muslim groups, depend on support provided by their 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 and may have disappeared altogether.Insurance companies[edit]

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Certificate issued by Republic Fire Insurance Co. of New York c. 1860Insurance companies may be classified into two groups:

• Life insurance companies, which sell life insurance, annuities and pensions products.

• Non-life or property/casualty insurance companies, which sell other types of insurance.

General insurance companies can be further divided into these sub categories.

• Standard lines • Excess lines

In most countries, life and non-life insurers are subject to different regulatory regimes and different tax and accounting rules. The main reason for the distinction between the two types of company is that life, annuity, and pension business is very long-term in nature – coverage for life assurance or a pension can cover risks over many decades. By contrast, non-life insurance cover usually covers a shorter period, such as one year.In the United States, standard line insurance companies are insurers that have received a license or authorization from a state for the purpose of writing specific kinds of insurance in that state, such as automobile insurance or homeowners' insurance.[34] They are typically

referred to as "admitted" insurers. Generally, such an insurance company must submit its rates and policy forms to the state's insurance regulator to receive his or her prior approval, although whether an insurance company must receive prior approval depends upon the kind of insurance being written. Standard line insurance companies usually charge lower premiums than excess line insurers and may sell directly to individual insureds. They are regulated by state laws, which include restrictions on rates and forms, and which aim to protect consumers and the public from unfair or abusive practices.[34] These insurers also are required to contribute to state guarantee funds, which are used to pay for losses if an insurer becomes insolvent.[34]

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The subscription room at Lloyd's of London in the early 19th century.Excess line insurance companies (also known as Excess and Surplus) typically insure risks not covered by the standard lines insurance market, due to a variety of reasons (e.g., new entity or an entity that does not have an adequate loss history, an entity with unique risk characteristics, or an entity that has a loss history that does not fit the underwriting requirements of the standard lines insurance market).[34] They are typically referred to as non-admitted or unlicensed insurers.[34] Non-admitted insurers are generally not licensed or authorized in the states in which they write business, although they must be licensed or authorized in the state in which they are domiciled.[34] These companies have more flexibility and can react faster than standard line insurance companies because they are not required to file rates and forms.[34] However, they still have substantial regulatory requirements placed upon them.

Most states require that excess line insurers submit financial information, articles of incorporation, a list of officers, and other general information.[34] They also may not write insurance that is typically available in the admitted market, do not participate in state guarantee funds (and therefore policyholders do not have any recourse through these funds if an insurer becomes insolvent and cannot pay claims), may pay higher taxes, only may write coverage for a risk if it has been rejected by three different admitted insurers, and only when the insurance producer placing the business has a surplus lines license.[34] Generally, when an excess line insurer writes a policy, it must, pursuant to state laws, provide disclosure to the policyholder that the policyholder's policy is being written by an excess line insurer.[34]

On July 21, 2010, President Barack Obama signed into law the Nonadmitted and Reinsurance Reform Act of 2010 ("NRRA"), which took effect on July 21, 2011, and was part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The NRRA changed the regulatory paradigm for excess line insurance. Generally, under the NRRA, only the insured's home state may regulate and tax the excess line transaction.[35]

Insurance companies are generally classified as either mutual or proprietary companies.[36] 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.Other possible forms for an insurance company include reciprocals, in which policyholders reciprocate in sharing risks, and Lloyd's organizations.Insurance companies are rated by various agencies such as A. M. 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.

Reinsurance companies are insurance companies that sell policies to other insurance companies, allowing them to reduce their risks and protect themselves from very large losses. The reinsurance market is dominated by a few very large companies, with huge reserves. A reinsurer may also be a direct writer of insurance risks as well.Captive insurance companies may be defined as limited-purpose insurance companies established with the specific objective of financing risks emanating from their parent group or groups. This definition can sometimes be extended to include some of the risks of the parent company's customers. In short, it is an in-house self-insurance vehicle. Captives may take the form of a "pure" entity (which is a 100% subsidiary of the self-insured parent company); of a "mutual" captive (which insures the collective risks of members of an industry); and of an "association" captive (which self-insures individual risks of the members of a professional, commercial or industrial association). Captives represent commercial, economic and tax advantages to their sponsors because of the reductions in costs they help create and for the ease of insurance risk management and the flexibility for cash flows they generate. Additionally, they may provide coverage of risks which is neither available nor offered in the traditional insurance market at reasonable prices.The types of risk that a captive can underwrite for their parents include property damage, public and product liability, professional indemnity, employee benefits, employers' liability, motor and medical aid expenses. The captive's exposure to such risks may be limited by the use of reinsurance.Captives are becoming an increasingly important component of the risk management and risk financing strategy of their parent. This can be understood against the following background:

• Heavy and increasing premium costs in almost every line of coverage

• Difficulties in insuring certain types of fortuitous risk • Differential coverage standards in various parts of the world • Rating structures which reflect market trends rather than

individual loss experience• Insufficient credit for deductibles and/or loss control efforts

There are also companies known as "insurance consultants". Like a mortgage broker, these companies are paid a fee by the customer to

shop around for the best insurance policy amongst many companies. Similar to an insurance consultant, an 'insurance broker' also shops around for the best insurance policy amongst many companies. However, with insurance brokers, the fee is usually paid in the form of commission from the insurer that is selected rather than directly from the client.Neither insurance consultants nor insurance brokers are insurance companies and no risks are transferred to them in insurance transactions. Third party administrators are companies that perform underwriting and sometimes claims handling services for insurance companies. These companies often have special expertise that the insurance companies do not have.The financial stability and strength of an insurance company should be a major consideration when buying an insurance contract. An insurance premium paid currently provides coverage for losses that might arise many years in the future. For that reason, the viability of the insurance carrier is very important. In recent years, a number of insurance companies have become insolvent, leaving their policyholders with no coverage (or coverage only from a government-backed insurance pool or other arrangement with less attractive payouts for losses). A number of independent rating agencies provide information and rate the financial viability of insurance companies.Across the world[edit]

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Life insurance premiums written in 2005

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Non-life insurance premiums written in 2005Global insurance premiums grew by 2.7% in inflation-adjusted terms in 2010 to $4.3 trillion, climbing above pre-crisis levels. The return to growth and record premiums generated during the year followed two years of decline in real terms. Life insurance premiums increased by 3.2% in 2010 and non-life premiums by 2.1%. While industrialised countries saw an increase in premiums of around 1.4%, insurance markets in emerging economies saw rapid expansion with 11% growth in premium income. The global insurance industry was sufficiently capitalised to withstand the financial crisis of 2008 and 2009 and most insurance companies restored their capital to pre-crisis levels by the end of 2010. With the continuation of the gradual recovery of the global economy, it is likely the insurance industry will continue to see growth in premium income both in industrialised countries and emerging markets in 2011.Advanced economies account for the bulk of global insurance. With premium income of $1.62 trillion, Europe was the most important region in 2010, followed by North America $1.409 trillion and Asia $1.161 trillion. Europe has however seen a decline in premium income during the year in contrast to the growth seen in North America and Asia. The top four countries generated more than a half of premiums. The United States and Japan alone accounted for 40% of world insurance, much higher than their 7% share of the global population. Emerging economies accounted for over 85% of the world's population but only around 15% of premiums. Their markets are however growing at a quicker pace.[37] The country expected to have the biggest impact on the insurance share distribution across the world is China. According to Sam Radwan of ENHANCE International LLC, low premium penetration (insurance premium as a % of GDP), an ageing population and the largest car market in terms of new sales, premium growth has averaged 15–20% in the past five years, and China is expected to be the largest insurance market in the next decade or two.[38]

Regulatory differences[edit]Main article: Insurance lawIn the United States, insurance is regulated by the states under the McCarran-Ferguson Act, with "periodic proposals for federal intervention", and a nonprofit coalition of state insurance agencies

called the National Association of Insurance Commissioners works to harmonize the country's different laws and regulations.[39] The National Conference of Insurance Legislators (NCOIL) also works to harmonize the different state laws.[40]

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.[41] As far as insurance in the United Kingdom, the Financial Services Authority took over insurance regulation from the General Insurance Standards Council in 2005;[42] laws passed include the Insurance Companies Act 1973 and another in 1982,[43] and reforms to warranty and other aspects under discussion as of 2012.[44]

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[45] 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.[46]

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.Controversies[edit] Insurance insulates too much[edit]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. To reduce their own financial exposure, insurance companies have contractual clauses that mitigate their obligation to

provide coverage if the insured engages in behavior that grossly magnifies their risk of loss or liability.[citation needed]

For example, life insurance companies may require higher premiums or deny coverage altogether to people who work in hazardous occupations or engage in dangerous sports. Liability insurance providers do not provide coverage for liability arising from intentional torts committed by or at the direction of the insured. Even if a provider desired to provide such coverage, it is against the public policy of most countries to allow such insurance to exist, and thus it is usually illegal.[citation needed]

Complexity of insurance policy contracts[edit]

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9/11 was a major insurance loss, but there were disputes over the World Trade Center's insurance policyInsurance 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 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 towards encouraging an insured to purchase more insurance than might be necessary at a higher price. A broker generally holds contracts with many insurers, thereby allowing the broker to "shop" the market for the best rates and coverage possible.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 sales 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 and/or agents. However, such a consultant must still work through brokers and/or agents in order to secure coverage for their clients.Limited consumer benefits[edit]In United States, economists and consumer advocates generally consider insurance to be worthwhile for low-probability, catastrophic losses, but not for high-probability, small losses. Because of this, consumers are advised to select high deductibles and to not insure losses which would not cause a disruption in their life. However, consumers have shown a tendency to prefer low deductibles and to prefer to insure relatively high-probability, small losses over low-probability, perhaps due to not understanding or ignoring the low-probability risk. This is associated with reduced purchasing of

insurance against low-probability losses, and may result in increased inefficiencies from moral hazard.[47]

Redlining[edit]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.[48]

In July 2007, The 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.[49] The report was disputed by representatives of the Consumer Federation of America, the National Fair Housing Alliance, the National Consumer Law Center, and the Center for Economic Justice, for relying on data provided by the insurance industry.[50]

All states have provisions in their rate regulation laws or in their fair trade practice acts that prohibit unfair discrimination, often called redlining, in setting rates and making insurance available.[51]

In determining premiums and premium rate structures, insurers consider quantifiable factors, including location, credit scores, gender, occupation, marital status, and education level. However, the use of such factors is often considered to be unfair or unlawfully discriminatory, and the reaction against this practice has in some instances led to political disputes about the ways in which insurers determine premiums and regulatory intervention to limit the factors used.

An insurance underwriter's job is to evaluate a given risk as to the likelihood that a loss will occur. Any factor that causes a greater likelihood of loss should theoretically be charged a higher rate. This basic principle of insurance must be followed if insurance companies are to remain solvent.[citation needed] Thus, "discrimination" against (i.e., negative differential treatment of) potential insureds in the risk evaluation and premium-setting process is a necessary by-product of the fundamentals of insurance underwriting. For instance, insurers charge older people significantly higher premiums than they charge younger people for term life insurance. Older people are thus treated differently from younger people (i.e., a distinction is made, discrimination occurs). The rationale for the differential treatment goes to the heart of the risk a life insurer takes: Old people are likely to die sooner than young people, so the risk of loss (the insured's death) is greater in any given period of time and therefore the risk premium must be higher to cover the greater risk. However, treating insureds differently when there is no actuarially sound reason for doing so is unlawful discrimination.Insurance patents[edit]Further information: Insurance patentNew 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 auto insurance. Early versions were independently invented and patented by a major US auto insurance company, Progressive Auto Insurance (U.S. Patent 5,797,134) and a Spanish independent inventor, Salvador Minguijon Perez (EP 0700009).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.[52]

Inventors can now have their insurance US patent applications reviewed by the public in the Peer to Patent program.[53] The first insurance patent application to be posted was US2009005522 "risk assessment company". It was posted on March 6, 2009. This patent application describes a method for increasing the ease of changing insurance companies.[54]

The insurance industry and rent-seeking[edit]Certain insurance products and practices have been described as rent-seeking by critics.[citation needed] That is, some insurance products or practices are useful primarily because of legal benefits, such as reducing taxes, as opposed to providing protection against risks of adverse events. Under United States tax law, for example, most owners of variable annuities and variable life insurance can invest their premium payments in the stock market and defer or eliminate paying any taxes on their investments until withdrawals are made. Sometimes this tax deferral is the only reason people use these products.[citation needed] Another example is the legal infrastructure which allows life insurance to be held in an irrevocable trust which is used to pay an estate tax while the proceeds themselves are immune from the estate tax.Religious concerns[edit]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[55] (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.[56]

Jewish rabbinical scholars also have expressed reservations regarding insurance as an avoidance of God's will but most find it acceptable in moderation.[57]

Some Christians believe insurance represents a lack of faith[citation needed] 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.[58][59][60] ompany, Progressive Auto Insurance (U.S. Patent 5,797,134) and a Spanish independent inventor, Salvador Minguijon Perez (EP 0700009).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.[52]

Inventors can now have their insurance US patent applications reviewed by the public in the Peer to Patent program.[53] The first insurance patent application to be posted was US2009005522 "risk assessment company". It was posted on March 6, 2009. This patent application describes a method for increasing the ease of changing insurance companies.[54]

The insurance industry and rent-seeking[edit]Certain insurance products and practices have been described as rent-seeking by critics.[citation needed] That is, some insurance products or practices are useful primarily because of legal benefits, such as reducing taxes, as opposed to providing protection against risks of adverse events. Under United States tax law, for example, most owners of variable annuities and variable life insurance can invest their premium payments in the stock market and defer or eliminate paying any taxes on their investments until withdrawals are made. Sometimes this tax deferral is the only reason people use these products.[citation needed] Another example is the legal infrastructure which allows life insurance to be held in an irrevocable trust which is used to pay an estate tax while the proceeds themselves are immune from the estate tax.

Religious concerns[edit]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[55] (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.[56]

Jewish rabbinical scholars also have expressed reservations regarding insurance as an avoidance of God's will but most find it acceptable in moderation.[57]

Some Christians believe insurance represents a lack of faith[citation needed] 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.[58][59][60]

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.[52]

Inventors can now have their insurance US patent applications reviewed by the public in the Peer to Patent program.[53] The first insurance patent application to be posted was US2009005522 "risk assessment company". It was posted on March 6, 2009. This patent application describes a method for increasing the ease of changing insurance companies.[54]

The insurance industry and rent-seeking[edit]Certain insurance products and practices have been described as rent-seeking by critics.[citation needed] That is, some insurance products or practices are useful primarily because of legal benefits, such as reducing taxes, as opposed to providing protection against risks of adverse events. Under United States tax law, for example, most owners of variable annuities and variable life insurance can invest their premium payments in the stock market and defer or eliminate paying any taxes on their investments until withdrawals are made. Sometimes this tax deferral is the only reason people use these products.[citation needed] Another example is the legal infrastructure which allows life insurance to be held in an irrevocable trust which is used to

pay an estate tax while the proceeds themselves are immune from the estate tax.Religious concerns[edit]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[55] (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.[56]

Jewish rabbinical scholars also have expressed reservations regarding insurance as an avoidance of God's will but most find it acceptable in moderation.[57]

Some Christians believe insurance represents a lack of faith[citation needed] 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.[58][59][60] a) To make recommendation for changing structure of insurance industry, for changing

general policy frame work etc.

b) To take specific suggestion regarding LIC and GIC with a view to improve functioning

of LIC and GIC.

c) To make recommendation on regulation and supervision of the insurance sector in

India.

d) To make recommendation on the role and functioning of surveyors, intermediaries,

like agent etc. in the insurance sector.

e) To make recommendation on any other matter which are relevant for the development

of the insurance industry in India?

Recommendations:

In1994, the committee submitted the report and give the following recommendations now

in the point form:

Structure:

Government stake in the insurance companies to be brought down to 50%.

All the insurance company should given greater freedom to operate.

Competition:

Private company with a minimum paid up capital of Rs 1 billon should be

allowed to enter in the industry.

No company should deal in life and general in single entity.

The insurance act should be changed.

An insurance regulatory board should be operate.

Customer Service:

LIC should pay interest on delays in payments beyond 30days.

Insurance companies should be encouraged to set up unit linked plan.

Computerization of operations and updating of technology to be carried out in

the insurance industry.

Overall the committee strongly felt that in order to improve the customer

service and increase the coverage of the insurance industry should be opened

up to competition. But at the same time, the committee felt the need to exercise

caution as any failure on the part of new players could ruin the public

confidence in the insurance industry.

PRIVITIZATION OF INSURANCE SECTOR

Insurance Services

Insurance investors developed economies, particularly from Western Europe and

the US find Indian market as having greater growth potential than their domestic

markets. Therefore, a high level of interest exists for these companies to acquire

insurance concerns. Many international players are eyeing the vast potential of

the Indian market and are already making plans to enter.

The entry of the foreign players in the sector with more financial resources/

better experience and lower operational costs will have an advantage over the

Indian companies involved in the business. The bigger private players claim that

opening up insurance will give policyholders better products and service, the

opponents of privatization argue that in a poor country like India insurance

needs to have social objectives and newcomers will not have that commitment.

Better experience provides them with the wherewithal to have a better product

mix and more operational flexibility. Moreover, they will operate with a lean staff

and lower operational cost. The domestic insurance industry will as a result,

have to face a greater competition. But the resources with the foreign players are

limited, as they can invest up to 40 per-cent of the equity of their joint-venture

with Indian firms. This is a great hindrance for them to perform at their optimum

level. IRDA is working out to gradually dismantle the tariff structure.

Not much threat is perceived as to any price war since the new companies will

stress more on the non-actuarial product differentiation. However, the Indian

Insurers due to their extensive branch networking and long-standing association

with the client still have an advantage.

Further, insurance products can become competing investment product vis-à-vis

other saving, etc. Already LIC has launched Equity linked Indexed Insurance

Policies, which have been received quite well. The new players are expected to

bring in spate of such products.

Insurance is viewed as a tax saving instrument rather than protecting one's own

kith and kin from the vagaries of the future. The rush for insurance policies to

save tax bills can be seen at the end of the financial year. With the entry of private

and global players like HDFC Standard Life, JCTCI Prudential, Kotak Mahindra

Club Insurance, Hindustan Times Commercial Union to name a few, the

insurance industry is going to provide many jobs and is going to witness

phenomenal growth.

LIBERALISATION OF INSURANCE MARKETS

Meaning:

A liberal insurance market is one in which the market, subject only to economically

justifiable government restrictions, determines; who should be allowed to sell insurance,

what product should be sold, how product should be sold, and the prices at which the

product should be sold.. In turn market access issues encompass prudential regulation.

Second and fourth items commonly deal with issues such as product, price, and market

conduct regulation. All four items subsume competition regulation.

Pre-conditions for Liberalization:

a) Sound competitive law.

b) Efficient and reliable regulation.

c) Phased-Liberalization.

d) Efficient disclose and dissemination of information to the society.

For developing countries, the regulation of insurance business in liberalization era poses

following concerns and special interest.

a) Restriction on entry, especially foreign players.

b) Suppression of price and product competition; and.

c) Control of inter-industry competition from those selling similar or complementary

products.

Insurance markets in countries like India inherently imperfection justifying

the need for competition as well as regulation. This is attributable for the following

reason:

a) Lack of knowledge on part of insured.

b) Insurance is a complicated, technical subject.

c) Intensity of price discrimination is high when there is competition.

What are Unit-Linked Insurance Plans?

Unit-linked insurance plans, ULIPs, are distinct from the more familiar ‘with profits’

policies sold for decades by the Life Insurance Corporation. With profits’ policies are

called so because investment gains (profits) are distributed to policyholders in the form of

a bonus announced every year.

ULIPs also serve the same function of providing insurance protection against death and

provision of long-term savings, but they are structured differently.

In ‘with profits’ policies, the insurance company credits the premium to a common pool

called the ‘life fund,’ after setting aside funds for the risk premium on life insurance and

management expenses.

Every year, the insurer calculates how much has to be paid to settle death and maturity

claims. The surplus in the life fund left after meeting these liabilities is credited to

policyholders’ accounts in the form of a bonus.

In a ULIP too, the insurer deducts charges towards life insurance (mortality

charges), administration charges and fund management charges. The rest of the premium

is used to invest in a fund that invests money in stocks or bonds. The policyholder’s share

in the fund is represented by the number of units.

The value of the unit is determined by the total value of all the investments

made by the fund divided by the number of units. If the insurance company offers a range

of funds, the insured can direct the company to invest in the fund of his choice. Insurers

usually offer three choices — an equity (growth) fund, balanced fund and a fund which

invests in bonds.

In both ‘with profits’ policies as well as unit-linked policies, a large part of the first year

premium goes towards paying the agents’ commissions

Unit-linked insurance plans, ULIPs, are distinct from the more familiar ‘with profits’

policies sold for decades by the Life Insurance Corporation. ‘With profits’ policies are

called so because investment gains (profits) are distributed to policyholders in the form of

a bonus announced every year.

Insurance From Wikipedia, the free encyclopedia

Jump to: navigation, searchThis article is about the risk management method. For insurance in blackjack, see Blackjack.

Financial market participants

�• Credit unions Insurance companies Investment banks Investment funds

Pension funds Prime brokers Trusts• Finance Financial market Participants Corporate finance Personal finance

Public finance Banks and banking Financial regulation• v t e

Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange for payment. It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. An insurer, or insurance carrier, is a company selling

the insurance; the insured, or policyholder, is the person or entity buying the insurance policy. The amount of money to be charged for a certain amount of insurance coverage is called the premium. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice.The 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 (indemnify) the insured in the case of a financial (personal) loss. The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insured will be financially compensated.

Contents  [hide] 1 History

1.1 Early methods 1.2 Modern insurance

2 Principles 2.1 Insurability 2.2 Legal 2.3 Indemnification

3 Societal effects 3.1 Methods of insurance

4 Insurers' business model 4.1 Underwriting and investing 4.2 Claims 4.3 Marketing

5 Types of insurance 5.1 Auto insurance

5.1.1 Gap insurance 5.2 Health insurance 5.3 Accident, sickness, and unemployment insurance 5.4 Casualty 5.5 Life

5.5.1 Burial insurance 5.6 Property 5.7 Liability 5.8 Credit 5.9 Other types

5.10 Insurance financing vehicles 5.11 Closed community self-insurance

6 Insurance companies 7 Across the world

7.1 Regulatory differences 8 Controversies

8.1 Insurance insulates too much 8.2 Complexity of insurance policy contracts 8.3 Limited consumer benefits 8.4 Redlining 8.5 Insurance patents 8.6 The insurance industry and rent-seeking 8.7 Religious concerns

9 See also 10 Notes 11 Bibliography 12 External links

History[edit] Main article: History of insuranceEarly methods[edit]

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Merchants have sought methods to minimize risks since early times. Pictured, Governors of the Wine Merchant's Guild by Ferdinand Bol, c. 1680.

Methods for transferring or distributing risk were practiced by Chinese and Babylonian traders as long ago as the 3rd and 2nd millennia BC, respectively.[1] Chinese merchants travelling treacherous river rapids would redistribute their wares across many vessels to limit the loss due to any single vessel's capsizing. The Babylonians developed a system which was recorded in the famous Code of Hammurabi, c.

1750 BC, and practiced by early Mediterranean sailing merchants. If a merchant received a loan to fund his shipment, he would pay the lender an additional sum in exchange for the lender's guarantee to cancel the loan should the shipment be stolen or lost at sea.At some point in the 1st millennium BC, the inhabitants of Rhodes created the 'general average'. This allowed groups of merchants to pay to insure their goods being shipped together. The collected premiums would be used to reimburse any merchant whose goods were jettisoned during transport, whether to storm or sinkage.[2]

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[edit]Insurance became far more sophisticated in Enlightenment era Europe, and specialized varieties developed.

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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".[4] 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.[5]

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 centre 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.[6]

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Leaflet promoting the National Insurance Act 1911.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.[7][8] Edward Rowe Mores established the Society for Equitable Assurances on Lives and Survivorship in 1762.It was the world's first mutual insurer and it pioneered age based premiums based on mortality rate laying "the framework for scientific insurance practice and development" and "the basis of modern life assurance upon which all life assurance schemes were subsequently based".[9]

In the late 19th century, "accident insurance" began to become available. This operated much like modern disability insurance.[10][11] The first company to offer accident insurance was the Railway Passengers Assurance Company, formed in 1848 in England to insure against the rising number of fatalities on the nascent railway system.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.[12][13] In Britain more extensive legislation was introduced by the Liberal government in the 1911 National Insurance Act. This gave the British working classes the first contributory system of insurance against illness and unemployment.[14] This system was greatly expanded after the Second World War under the influence of the Beveridge Report, to form the first modern welfare state.[12][15]

Principles[edit] 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 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.[16]

Insurability[edit]Main article: InsurabilityRisk which can be insured by private companies typically shares seven common characteristics:[17]

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. Capital constrains 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[edit]When a company insures an individual entity, there are basic legal requirements and regulations. Several commonly cited legal principles of insurance include:[18]

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[edit]Main article: IndemnityTo "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[19] 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.[19][20]

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.Societal effects[edit] 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 moral hazard to refer to increased risk due to intentional carelessness or indifference.[21] 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.[22]

Methods of insurance[edit]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

coverage3 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

Insurers' business model[edit]

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Accidents will happen (William H. Watson, 1922) is a slapstick silent film about the methods and mishaps of an insurance broker. Collection EYE Film Institute Netherlands.Underwriting and investing[edit]The business model is to collect more in premium and investment income than is paid out in losses, and to also offer a competitive price which consumers will accept. Profit can be reduced to a simple equation:Profit = earned premium + investment income – incurred loss – underwriting expenses.Insurers make money in two ways:

• Through underwriting, the process by which insurers select the risks to insure and decide how much in premiums to charge for accepting those risks

• By investing the premiums they collect from insured parties The most complicated aspect of the insurance business is the actuarial science of ratemaking (price-setting) of policies, which uses statistics and probability to approximate the rate of future claims based on a given risk. After producing rates, the insurer will use discretion to reject or accept risks through the underwriting process.At the most basic level, initial ratemaking involves looking at the frequency and severity of insured perils and the expected average payout resulting from these perils. Thereafter an insurance company will collect historical loss data, bring the loss data to present value, and compare these prior losses to the premium collected in order to

assess rate adequacy.[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. The Association of British Insurers (gathering 400 insurance companies and 94% of UK insurance services) has almost 20% of the investments in the London Stock Exchange.[25]

In the United States, the underwriting loss of property and casualty insurance companies was $142.3 billion in the five years ending 2003. But overall profit for the same period was $68.4 billion, as the result of float. Some insurance industry insiders, most notably 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 depressed period. Bear markets do cause insurers to shift away from investments and to toughen up their underwriting standards, so a poor economy generally means high insurance premiums. This tendency to swing between profitable and unprofitable periods over time is commonly known as the underwriting, or insurance, cycle.[26]

Claims[edit]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[edit]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.[27]

Types of insurance[edit] 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 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.[28]

Auto insurance[edit]Main article: Vehicle insurance

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A wrecked vehicle in CopenhagenAuto 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[edit]Main article: Gap insuranceGap 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 companies 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 your finance company when you first purchase your vehicle. Most auto insurance companies offer this coverage to consumers as well. If you are unsure if GAP coverage had been purchased, you should check your vehicle lease or purchase documentation.Health insurance[edit]Main articles: Health insurance and Dental insurance

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Great Western Hospital, SwindonHealth 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.Accident, sickness, and unemployment insurance[edit]

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Workers' compensation, or employers' liability insurance, is compulsory in some countries

• Disability insurance policies provide financial support in the event of the policyholder becoming unable to work because of disabling illness or injury. It provides monthly support to help pay such obligations as mortgage loans and credit cards. Short-term and long-term disability policies are available to individuals, but considering the expense, long-term policies are generally obtained only by those with at least six-figure incomes, such as doctors, lawyers, etc. Short-term disability insurance covers a person for a period typically up to six months, paying a stipend each month to cover medical bills and other necessities.

• Long-term disability insurance covers an individual's expenses for the long term, up until such time as they are considered permanently disabled and thereafter. 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 wages lost and accompanying medical expenses incurred because of a job-related injury.

Casualty[edit]Main article: Casualty insuranceCasualty 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.

• 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 political conditions could result in a loss.

Life[edit]Main article: Life insurance

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Amicable Society for a Perpetual Assurance Office, Serjeants' Inn, Fleet Street, London, 1801Life insurance provides a monetary benefit to a decedent's family or other designated beneficiary, and may specifically provide for income to an insured person's family, burial, funeral and other final expenses. Life insurance policies often allow the option of having the proceeds paid to the beneficiary either in a lump sum cash payment or an annuity. In most states, a person cannot purchase a policy on another person without their knowledge.Annuities provide a stream of payments and are generally classified as insurance because they are issued by insurance companies, are regulated as insurance, and require the same kinds of actuarial and investment management expertise that life insurance requires. Annuities and pensions that pay a benefit for life are sometimes regarded as insurance against the possibility that a retiree will outlive his or her financial resources. In that sense, they are the complement of life insurance and, from an underwriting perspective, are the mirror image of life insurance.Certain life insurance contracts accumulate cash values, which may be taken by the insured if the policy is surrendered or which may be borrowed against. Some policies, such as annuities and endowment

policies, are financial instruments to accumulate or liquidate wealth when it is needed.In many countries, such as the 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[edit]Burial insurance is a very old type of life insurance which is paid out upon death to cover final expenses, such as the cost of a funeral. The Greeks and Romans introduced burial insurance c. 600 CE when they organized guilds called "benevolent societies" which cared for the surviving families and paid funeral expenses of members upon death. Guilds in the Middle Ages served a similar purpose, as did friendly societies during Victorian times.Property[edit]Main article: Property insurance

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This tornado damage to an Illinois home would be considered an "Act of God" for insurance purposes

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:

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US Airways Flight 1549 was written off after ditching into the Hudson River• Aviation insurance protects aircraft hulls and spares, and

associated liability risks, such as passenger and third-party liability. Airports may also appear under this subcategory, including air traffic control and refuelling operations for international airports through to smaller domestic exposures.

• Boiler insurance (also known as boiler and machinery insurance, or equipment breakdown insurance) insures against accidental physical damage to boilers, equipment or machinery.

• Builder's risk insurance insures against the risk of physical loss or damage to property during construction. Builder's risk insurance is typically written on an "all risk" basis covering damage arising from any cause (including the negligence of the insured) not otherwise expressly excluded. Builder's risk insurance is coverage that protects a person's or organization's insurable interest in materials, fixtures 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.[29]

• 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.[30]

• 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.

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Hurricane Katrina caused over $80 billion of storm and flood damage• Flood insurance protects against property loss due to flooding.

Many U.S. insurers do not provide flood insurance in some parts of the country. In response to this, the federal government created the National Flood Insurance Program which serves as the insurer of last resort.

• Home insurance, also commonly called hazard insurance or homeowners insurance (often abbreviated in the real estate industry as HOI), provides coverage for damage or destruction of the policyholder's home. In some geographical areas, the policy may exclude certain types of risks, such as flood or earthquake, that require additional coverage. Maintenance-related issues are typically the homeowner's responsibility. The policy may include inventory, or this can be bought as a separate policy, especially for people who rent housing. In some countries, insurers offer a package which may include liability and legal responsibility for injuries and property damage caused by members of the household, including pets.[31]

• 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 principal.

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The demand for terrorism insurance surged after 9/11• 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).

• 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 as hurricanes.

Liability[edit]Main article: Liability insuranceLiability 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.

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The subprime mortgage crisis was the source of many liability insurance losses• Public 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 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 malpractice insurance.

Credit[edit]Main article: Payment protection insuranceCredit insurance repays some or all of a loan when certain circumstances arise to the borrower such as unemployment, disability, or death.

• 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.

Other types[edit]• 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.[32] In car insurance, all-risk policy includes also the damages caused by the own driver.

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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 insurance covers the loss of income, and the expenses incurred, after a covered peril interrupts normal business operations.

• Collateral protection insurance (CPI) insures property (primarily vehicles) held as collateral for loans made by lending institutions.

• 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.

• 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.

• 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 and 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 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.

• 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[edit]• Fraternal insurance is provided on a cooperative basis by

fraternal benefit societies or other social organizations.[33]

• 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 the welfare state. This is a large, complicated topic that engenders tremendous debate, which can be further studied in the following articles (and others):

• National Insurance • Social safety net • Social security • Social Security debate (United States) • Social Security (United States) • Social welfare provision

• 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 self-insurance[edit]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 some Muslim groups, depend on support provided by their 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 and may have disappeared altogether.Insurance companies[edit]

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Certificate issued by Republic Fire Insurance Co. of New York c. 1860Insurance companies may be classified into two groups:

• Life insurance companies, which sell life insurance, annuities and pensions products.

• Non-life or property/casualty insurance companies, which sell other types of insurance.

General insurance companies can be further divided into these sub categories.

• Standard lines • Excess lines

In most countries, life and non-life insurers are subject to different regulatory regimes and different tax and accounting rules. The main reason for the distinction between the two types of company is that life, annuity, and pension business is very long-term in nature – coverage for life assurance or a pension can cover risks over many decades. By contrast, non-life insurance cover usually covers a shorter period, such as one year.In the United States, standard line insurance companies are insurers that have received a license or authorization from a state for the purpose of writing specific kinds of insurance in that state, such as automobile insurance or homeowners' insurance.[34] They are typically

referred to as "admitted" insurers. Generally, such an insurance company must submit its rates and policy forms to the state's insurance regulator to receive his or her prior approval, although whether an insurance company must receive prior approval depends upon the kind of insurance being written. Standard line insurance companies usually charge lower premiums than excess line insurers and may sell directly to individual insureds. They are regulated by state laws, which include restrictions on rates and forms, and which aim to protect consumers and the public from unfair or abusive practices.[34] These insurers also are required to contribute to state guarantee funds, which are used to pay for losses if an insurer becomes insolvent.[34]

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The subscription room at Lloyd's of London in the early 19th century.Excess line insurance companies (also known as Excess and Surplus) typically insure risks not covered by the standard lines insurance market, due to a variety of reasons (e.g., new entity or an entity that does not have an adequate loss history, an entity with unique risk characteristics, or an entity that has a loss history that does not fit the underwriting requirements of the standard lines insurance market).[34] They are typically referred to as non-admitted or unlicensed insurers.[34] Non-admitted insurers are generally not licensed or authorized in the states in which they write business, although they must be licensed or authorized in the state in which they are domiciled.[34] These companies have more flexibility and can react faster than standard line insurance companies because they are not required to file rates and forms.[34] However, they still have substantial regulatory requirements placed upon them.

Most states require that excess line insurers submit financial information, articles of incorporation, a list of officers, and other general information.[34] They also may not write insurance that is typically available in the admitted market, do not participate in state guarantee funds (and therefore policyholders do not have any recourse through these funds if an insurer becomes insolvent and cannot pay claims), may pay higher taxes, only may write coverage for a risk if it has been rejected by three different admitted insurers, and only when the insurance producer placing the business has a surplus lines license.[34] Generally, when an excess line insurer writes a policy, it must, pursuant to state laws, provide disclosure to the policyholder that the policyholder's policy is being written by an excess line insurer.[34]

On July 21, 2010, President Barack Obama signed into law the Nonadmitted and Reinsurance Reform Act of 2010 ("NRRA"), which took effect on July 21, 2011, and was part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The NRRA changed the regulatory paradigm for excess line insurance. Generally, under the NRRA, only the insured's home state may regulate and tax the excess line transaction.[35]

Insurance companies are generally classified as either mutual or proprietary companies.[36] 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.Other possible forms for an insurance company include reciprocals, in which policyholders reciprocate in sharing risks, and Lloyd's organizations.Insurance companies are rated by various agencies such as A. M. 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.

Reinsurance companies are insurance companies that sell policies to other insurance companies, allowing them to reduce their risks and protect themselves from very large losses. The reinsurance market is dominated by a few very large companies, with huge reserves. A reinsurer may also be a direct writer of insurance risks as well.Captive insurance companies may be defined as limited-purpose insurance companies established with the specific objective of financing risks emanating from their parent group or groups. This definition can sometimes be extended to include some of the risks of the parent company's customers. In short, it is an in-house self-insurance vehicle. Captives may take the form of a "pure" entity (which is a 100% subsidiary of the self-insured parent company); of a "mutual" captive (which insures the collective risks of members of an industry); and of an "association" captive (which self-insures individual risks of the members of a professional, commercial or industrial association). Captives represent commercial, economic and tax advantages to their sponsors because of the reductions in costs they help create and for the ease of insurance risk management and the flexibility for cash flows they generate. Additionally, they may provide coverage of risks which is neither available nor offered in the traditional insurance market at reasonable prices.The types of risk that a captive can underwrite for their parents include property damage, public and product liability, professional indemnity, employee benefits, employers' liability, motor and medical aid expenses. The captive's exposure to such risks may be limited by the use of reinsurance.Captives are becoming an increasingly important component of the risk management and risk financing strategy of their parent. This can be understood against the following background:

• Heavy and increasing premium costs in almost every line of coverage

• Difficulties in insuring certain types of fortuitous risk • Differential coverage standards in various parts of the world • Rating structures which reflect market trends rather than

individual loss experience• Insufficient credit for deductibles and/or loss control efforts

There are also companies known as "insurance consultants". Like a mortgage broker, these companies are paid a fee by the customer to

shop around for the best insurance policy amongst many companies. Similar to an insurance consultant, an 'insurance broker' also shops around for the best insurance policy amongst many companies. However, with insurance brokers, the fee is usually paid in the form of commission from the insurer that is selected rather than directly from the client.Neither insurance consultants nor insurance brokers are insurance companies and no risks are transferred to them in insurance transactions. Third party administrators are companies that perform underwriting and sometimes claims handling services for insurance companies. These companies often have special expertise that the insurance companies do not have.The financial stability and strength of an insurance company should be a major consideration when buying an insurance contract. An insurance premium paid currently provides coverage for losses that might arise many years in the future. For that reason, the viability of the insurance carrier is very important. In recent years, a number of insurance companies have become insolvent, leaving their policyholders with no coverage (or coverage only from a government-backed insurance pool or other arrangement with less attractive payouts for losses). A number of independent rating agencies provide information and rate the financial viability of insurance companies.Across the world[edit]

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Life insurance premiums written in 2005

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Non-life insurance premiums written in 2005Global insurance premiums grew by 2.7% in inflation-adjusted terms in 2010 to $4.3 trillion, climbing above pre-crisis levels. The return to growth and record premiums generated during the year followed two years of decline in real terms. Life insurance premiums increased by 3.2% in 2010 and non-life premiums by 2.1%. While industrialised countries saw an increase in premiums of around 1.4%, insurance markets in emerging economies saw rapid expansion with 11% growth in premium income. The global insurance industry was sufficiently capitalised to withstand the financial crisis of 2008 and 2009 and most insurance companies restored their capital to pre-crisis levels by the end of 2010. With the continuation of the gradual recovery of the global economy, it is likely the insurance industry will continue to see growth in premium income both in industrialised countries and emerging markets in 2011.Advanced economies account for the bulk of global insurance. With premium income of $1.62 trillion, Europe was the most important region in 2010, followed by North America $1.409 trillion and Asia $1.161 trillion. Europe has however seen a decline in premium income during the year in contrast to the growth seen in North America and Asia. The top four countries generated more than a half of premiums. The United States and Japan alone accounted for 40% of world insurance, much higher than their 7% share of the global population. Emerging economies accounted for over 85% of the world's population but only around 15% of premiums. Their markets are however growing at a quicker pace.[37] The country expected to have the biggest impact on the insurance share distribution across the world is China. According to Sam Radwan of ENHANCE International LLC, low premium penetration (insurance premium as a % of GDP), an ageing population and the largest car market in terms of new sales, premium growth has averaged 15–20% in the past five years, and China is expected to be the largest insurance market in the next decade or two.[38]

Regulatory differences[edit]Main article: Insurance lawIn the United States, insurance is regulated by the states under the McCarran-Ferguson Act, with "periodic proposals for federal intervention", and a nonprofit coalition of state insurance agencies

called the National Association of Insurance Commissioners works to harmonize the country's different laws and regulations.[39] The National Conference of Insurance Legislators (NCOIL) also works to harmonize the different state laws.[40]

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.[41] As far as insurance in the United Kingdom, the Financial Services Authority took over insurance regulation from the General Insurance Standards Council in 2005;[42] laws passed include the Insurance Companies Act 1973 and another in 1982,[43] and reforms to warranty and other aspects under discussion as of 2012.[44]

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[45] 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.[46]

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.Controversies[edit] Insurance insulates too much[edit]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. To reduce their own financial exposure, insurance companies have contractual clauses that mitigate their obligation to

provide coverage if the insured engages in behavior that grossly magnifies their risk of loss or liability.[citation needed]

For example, life insurance companies may require higher premiums or deny coverage altogether to people who work in hazardous occupations or engage in dangerous sports. Liability insurance providers do not provide coverage for liability arising from intentional torts committed by or at the direction of the insured. Even if a provider desired to provide such coverage, it is against the public policy of most countries to allow such insurance to exist, and thus it is usually illegal.[citation needed]

Complexity of insurance policy contracts[edit]

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9/11 was a major insurance loss, but there were disputes over the World Trade Center's insurance policyInsurance 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 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 towards encouraging an insured to purchase more insurance than might be necessary at a higher price. A broker generally holds contracts with many insurers, thereby allowing the broker to "shop" the market for the best rates and coverage possible.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 sales 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 and/or agents. However, such a consultant must still work through brokers and/or agents in order to secure coverage for their clients.Limited consumer benefits[edit]In United States, economists and consumer advocates generally consider insurance to be worthwhile for low-probability, catastrophic losses, but not for high-probability, small losses. Because of this, consumers are advised to select high deductibles and to not insure losses which would not cause a disruption in their life. However, consumers have shown a tendency to prefer low deductibles and to prefer to insure relatively high-probability, small losses over low-probability, perhaps due to not understanding or ignoring the low-probability risk. This is associated with reduced purchasing of

insurance against low-probability losses, and may result in increased inefficiencies from moral hazard.[47]

Redlining[edit]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.[48]

In July 2007, The 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.[49] The report was disputed by representatives of the Consumer Federation of America, the National Fair Housing Alliance, the National Consumer Law Center, and the Center for Economic Justice, for relying on data provided by the insurance industry.[50]

All states have provisions in their rate regulation laws or in their fair trade practice acts that prohibit unfair discrimination, often called redlining, in setting rates and making insurance available.[51]

In determining premiums and premium rate structures, insurers consider quantifiable factors, including location, credit scores, gender, occupation, marital status, and education level. However, the use of such factors is often considered to be unfair or unlawfully discriminatory, and the reaction against this practice has in some instances led to political disputes about the ways in which insurers determine premiums and regulatory intervention to limit the factors used.

An insurance underwriter's job is to evaluate a given risk as to the likelihood that a loss will occur. Any factor that causes a greater likelihood of loss should theoretically be charged a higher rate. This basic principle of insurance must be followed if insurance companies are to remain solvent.[citation needed] Thus, "discrimination" against (i.e., negative differential treatment of) potential insureds in the risk evaluation and premium-setting process is a necessary by-product of the fundamentals of insurance underwriting. For instance, insurers charge older people significantly higher premiums than they charge younger people for term life insurance. Older people are thus treated differently from younger people (i.e., a distinction is made, discrimination occurs). The rationale for the differential treatment goes to the heart of the risk a life insurer takes: Old people are likely to die sooner than young people, so the risk of loss (the insured's death) is greater in any given period of time and therefore the risk premium must be higher to cover the greater risk. However, treating insureds differently when there is no actuarially sound reason for doing so is unlawful discrimination.Insurance patents[edit]Further information: Insurance patentNew 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 auto insurance. Early versions were independently invented and patented by a major US auto insurance company, Progressive Auto Insurance (U.S. Patent 5,797,134) and a Spanish independent inventor, Salvador Minguijon Perez (EP 0700009).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.[52]

Inventors can now have their insurance US patent applications reviewed by the public in the Peer to Patent program.[53] The first insurance patent application to be posted was US2009005522 "risk assessment company". It was posted on March 6, 2009. This patent application describes a method for increasing the ease of changing insurance companies.[54]

The insurance industry and rent-seeking[edit]Certain insurance products and practices have been described as rent-seeking by critics.[citation needed] That is, some insurance products or practices are useful primarily because of legal benefits, such as reducing taxes, as opposed to providing protection against risks of adverse events. Under United States tax law, for example, most owners of variable annuities and variable life insurance can invest their premium payments in the stock market and defer or eliminate paying any taxes on their investments until withdrawals are made. Sometimes this tax deferral is the only reason people use these products.[citation needed] Another example is the legal infrastructure which allows life insurance to be held in an irrevocable trust which is used to pay an estate tax while the proceeds themselves are immune from the estate tax.Religious concerns[edit]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[55] (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.[56]

Jewish rabbinical scholars also have expressed reservations regarding insurance as an avoidance of God's will but most find it acceptable in moderation.[57]

Some Christians believe insurance represents a lack of faith[citation needed] 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.[58][59][60] ULIPs also serve the same function of providing insurance protection against death and provision of long-term savings, but they are structured differently. In ‘with profits’ policies, the insurance company credits the premium to a common pool called the ‘life fund,’ after setting aside funds for the risk premium on life insurance and management expenses. Every year, the insurer calculates how much has to be paid to settle death and maturity claims. The surplus in the life fund left after meeting these liabilities is credited to policyholders’ accounts in the form of a bonus. In a ULIP too, the insurer deducts charges towards life insurance (mortality charges), administration charges and fund management charges. The rest of the premium is used to invest in a fund that invests money in stocks or bonds. The policyholder’s share in the fund is represented by the number of units. The value of the unit is determined by the total value of all the investments made by the fund divided by the number of units. If the insurance company offers a range of funds, the insured can direct the company to invest in the fund of his choice. Insurers usually offer three choices — an equity (growth) fund, balanced fundand a fund which invests in bonds. In both ‘with profits’ policies as well as unit-linked policies, a large part of the first year premium goes towards paying the agents’ commissions Unique features

1. Unit linked plan to give you efficient earnings in the long term.

1. Three investment fund options: protector, builder and enhancer, with the freedom to

switch between funds any time during the policy tenure.

1. Flexibility to make additional lump sum investments ( top ups ) to increase the

savings portion of your policy

1. Minimum guaranteed returns of 3% pa. On your premium net of all policy fee and

charges the entire upside on the performance of the fund is passed on to you

1. Option to make tax free withdrawal from your fund anytime after three years

1. Loan against your policy or surrender of the policy without penalty after a policy year

1. Vary the face amour during the premium paying period depending on your life

insurance requirements.

2. Convenient premium payment option singe pay, short pay or regular pay

Which is better, unit-linked or ‘with profits’?

The two strong arguments in favour of unit-linked plans are that — the investor

knows exactly what is happening to his money and two; it allows the investor to choose

the assets into which he wants his funds invested.

A traditional ‘with profits,’ on the other hand, is a black box and

a policyholder has little knowledge of what is happening. An investor in a ULIP knows

how much he is paying towards mortality, management and administration charges.

He also knows where the insurance company has invested the money. The

investor gets exactly the same returns that the fund earns, but he also bears the investment

risk

Are ULIPs similar to mutual funds?

In structure, yes; in objective, no. Because of the high first-year charges, mutual funds are

a better option if you have a five-year horizon.

But if you have a horizon of 10 years or more, then ULIPs have an edge. To explain this

further a ULIP has high first-year charges towards acquisition (including agents’

commissions).

As a result, they find it difficult to outperform mutual funds in the first five years. But in

the long-term, ULIP managers have several advantages over mutual fund managers.

Since policyholder premiums come at regular intervals, investments can be planned out

more evenly.

Mutual fund managers cannot take a similar long-term view because they have bulk

investors who can move money in and out of schemes at short notice.

The transparency makes the product more competitive. So if you are willing to bear the

investment risks in order to generate a higher return on your retirement funds, ULIPs are

for you.

Traditional ‘with profits’ policies too invest in the market and generate the same returns

prevailing in the market. But here the insurance company evens out returns to ensure that

policyholders do not lose money in a bad year. In that sense they are safer.

ULIPs also offer flexibility. For instance, a policyholder can ask the insurance company

to liquidate units in his account to meet the mortality charges if he is unable to pay any

premium installment.

This eats into his savings, but ensures that the policy will continue to cover his life But in

the long-term, ULIP managers have several advantages over mutual fund managers.

Since policyholder premiums come at regular intervals, investments can be planned out

more evenly.

Mutual fund managers cannot take a similar long-term view because they have bulk

investors who can move money in and out of schemes at short notice.

Advantages of ULIPS to insurers:

Insurers love ULIPs for several reasons. Most important of all, insurers can sell these

policies with less capital of their own than what would be required if they sold traditional

policies.

In traditional ‘with profits’ policies, the insurance company bears the investment risk to

the extent of the assured amount. In ULIPs, the policyholder bears most of the investment

risk.

Since ULIPs are devised to mobilize savings, they give insurance companies an

opportunity to get a large chunk of the asset management business, which has been

traditionally dominated by mutual funds.

Most insurers in the year 2004 have started offering at least a few unit-linked plans. Unit-

linked life insurance products are those where the benefits are expressed in terms of

number of units and unit price. They can be viewed as a combination of insurance and

mutual funds. The number of units, which the customer would get, would depend on the

unit price when he pays his premium. The daily unit price is based on the market value of

the underlying assets (equities, bonds, government securities etc.) and computed from the

net asset value.

The advantage of Unit linked plans:

Unit Linked plans are simple, clear, and easy to understand. Being transparent the

policyholder gets the entire upside on the performance of his fund. Besides all the

advantages they offer to the customers, unit-linked plans also lead to an efficient

utilization of capital.

Unit-linked products are exempted from tax and they provide life insurance. Investors

welcome these products as they provide capital appreciation even as the yields on

government securities have fallen below 6 per cent, which has made the insurers slash

payouts.

According to the IRDA, a company offering unit linked plans must give the investor an

option to choose among debt, balanced and equity funds. If you opt for a unit-linked

endowment policy, you can choose to invest your premiums in debt, balanced or equity

plans. If you choose a debt plan, the majority of your premiums will get invested in debt

securities like gilts and bonds. If you choose equity, then a major portion of your

premiums will be invested in the equity market. The plan you choose would depend on

your risk profile and your investment need.

The ideal time to buy a unit-linked plan is when one can expect long-term growth ahead.

This is especially so if one also believes that current market values (stock valuations) are

relatively low. So if you are opting for a plan that invests primarily in equity, the buzzing

market could lead to windfall returns. However, should the buzz die down, investors

could be left stung.

If one invests in a unit-linked pension plan early on, say 25, one can afford to take the

risk associated with equities, at least in the plan's initial stages. However, as one

approaches retirement the quantum of returns should be subordinated to capital

preservation. At this stage, investing in a plan that has an equity tilt may not be a good

idea.

Considering that unit-linked plans are relatively new launches, their short history does

not permit an assessment of how they will perform in different phases of the stock

market. Even if one views insurance as a long-term commitment, investments based on

performance over such a short time span may not be appropriate.

Ever since the insurance sector was opened up, private players have been trying to entice

the Indian customer with new and innovative policies. But is the customer ready for

innovations--such as unit-linked plans?

These plans are popular in developed and other developing

markets, but India has so far had only one such product from LIC. Stuart Purdy,

managing director, Aviv a Life Insurance India, told Narayan Krishnamurthy and

Udayan Ray that most of Aviva’s offerings here are unit-linked and he is betting on these

products being successful.

Can unit-linked plans actually fetch you market linked

returns?

Unit-linked insurance plans are all of a sudden much talked about, publicized and sold.

While these are not a recent phenomenon, since a number of insurance companies already

had these products as a part of their portfolio, of late these plans have seen sudden frenzy.

It is perhaps the bull phase or the lure of market-linked returns that insurance companies

have been shouting hoarse about that is responsible for these products outselling others.

Given a thought? Do these products actually provide you market linked returns? Now

before we get into the details, is that what you should be looking for from an insurance

product?

Isn’t insurance in the real sense of the term meant for covering risk? And should you be

aiming at financialReturns from an insurance product since that would mean

compromising on the much more important security cover for yourself and your family?

If returns are your aim don’t you think you should be opting for other investment avenues

rather than risk your risk cover.While this is not to dissuade you from purchasing unit

linked covers it would be in your interest to take a peek at the ‘market linked returns’ you

can expect. And if you think that the entire premium you pay is invested in avenues

chosen by you to maximize returns you could be wrong.

Expenses during the first year:

A substantial amount is deducted from your premium income by the insurance company

towards various charges reducing the investible amount considerably. In the first year

Allianz Bajaj through its Unit Gain SP Plus claims to allocate 100 percent of the single

premium you

Invest but cancels units on a monthly basis towards various charges from your fund.

Accordingly Kotak Safe Investment Plan allocates 86% and Life time of ICICI Prudential

Life allocates 80 percent for amounts less than Rs 50,000 and 82 percent for those above

Rs 50,000 towards investments.

Administration expenses:

The fund expense is the highest in the first year. ICICI Pru Life charges administration

expenses of 20 percent of the premium for amounts below Rs 50,000 and 18 percent for

amounts over Rs 50,000 in the first year while it is 7 percent for amounts upto Rs 20,000

in case of Kotak Safe Investment plan.

Again there are annual administrative charges that are as high as 1.25 percent per annum

of net assets on Life Link of ICICI Pru Life and on Unit Gain SP Plus of Allianz Bajaj

Life Insurance

Will unit linked risk products continue to rule: -

Unit linked risk plans are doing roaring business agreed but if the recent reports are any

indication a shake up is on the cards. The mutual fund industry is all set to get aggressive

to counter competition from the insurance industry’s unit linked risk products. For mutual

funds the unit linked insurance products launched by life insurance companies are an

encroachment on their territory. Consider this: Around 80 per cent of the premium

income of life insurers has come in through unit-linked plans in 2004 thanks to the boom

in the equity markets.

This means mutual fund companies are losing out on a huge market that would have

otherwise been theirs. To put an end to such a situation they are toying with the idea of

aggressively publicizing its products through celebrity endorsements which mutual funds

feel will give a never-before fillip to its unit linked schemes.

Unit linked insurance products launched have been doing brisk business and insurers

have been coming out with several such products with slight variations to suit the

changing needs of the customers. These products are investment avenues that provide

market related returns to the investor with an element of insurance thrown in. For the

customer the attraction of market related returns with insurance is an attractive option. On

the contrary though mutual fund companies also have unit-linked products what is absent

is the insurance cover.

But the grouse of mutual funds is that they have to adhere to stringent regulations that are

absent for insurance companies when the products are almost similar. While for insurance

companies it is not mandatory to disclose the various expenses related to unit linked risk

products such as expense ratio and brokerages among others, for mutual fund companies

it is mandatory. The Association of Mutual Funds will soon be setting up a committee to

work out an advertising strategy after which it plans to approach SEBI to take it from

there. But will SEBI be able to take up the matter with the insurance regulator? Should I

invest in unit-linked plans?

So have unit linked plans - the much talked about high-return offering product of late

taken your fancy? Wondering what it is all about and how unit linked plans are able to

offer a comparatively better return on your investment.

While they are not a totally new concept considering that the Indian investor is familiar

with mutual funds that have been around for some time now, as far as insurance goes,

unit linked has all of a sudden caught the fancy of the Indian customer.If you are all set to

take the plunge into buying a unit linked product it would do well to know a few things

about their working.

Combination of mutual fund and insurance cover:

Unit-linked plans are a combination of an investment fund and an insurance policy. A

major part of the premium amount received on such policies is invested in the stock

market by the insurer in select funds depending on the risk level chosen by the customer.

Mind you, this is after deducting administration charges and management expenses that

may vary from one fund to the other.

Choice of Funds:

The customer has the option of choosing from debt, balance and equity funds. If the

individual chooses a debt fund, a major part of his premia is invested in debt securities

like gilts and bonds. But if it is equity, a major portion goes towards investments in the

stock market. So depending on the risk profile the individual may choose his investment

option.

What do unit-linked products actually offer in terms of value-addition?

When you are looking at a long-term plan, there are always factors that will change from

time to time to meet any challenges. Also, plans change so that the company can offer

some amount of customization. Among other things, we offer to add the cover to the

policy, add riders when necessary, and change the investment structure. We also let

customers choose from different fund options on the investment without compromising

on the basic product.

While all these options do come with caps to follow the regulatory framework, they

definitely offer value-addition to the customer. And, with the NAV (net asset value) of the

fund calculated at the end of the day, the customer knows the value of his funds. I must

add that that in case of death, the beneficiary gets the sum assured or the NAV of the

fund, whichever is higher. So, there is no reduction in protection in these plans.

Is the investment risk left to the customer who buys unit-linked plans?

For any investor, the idea is to maximize returns. Wise customers know that the era

of guaranteed returns is over. The fall in interest rates in the past 18 months is indication

enough of what lies ahead. What unit-linked products offer is a long-term investment

option where returns are far more real and there is no compromise in the protection that

the policy offers.

In the guaranteed returns regime, the guaranteed component was met by paying lower

interest rates to those who did not have any guarantee on their plans. Compared to this,

unit-linked plans offer greater value to the customer. Yes, to an extent the risk is in the

hands of the customer. However, the flexibility to opt for funds means that the customer

can benefit as well. And finally, the returns that these products offer are bound to be

relatively higher than what similar traditional plans offer.

In order to cater to customers with very low risk appetite we also offer a unitised, with-

profit plan across our products, where the bonus rate is declared in advance for the year.

This is a conservative approach but it has its takers. With this

What has been the performance of unit-linked plans in other emerging markets?

In a country like Poland, where the markets were opened a little over a decade ago, we

are today the largest private insurance company. The demand for our unit-linked products

is high. Worldwide, the growth of these products is high when compared to traditional

products, an indication of where the market is headed.

There are a few people who view unit-linked plans as pure investment products that offer

little cover. But this is a myth and customers realize this when the benefit of these plans is

explained to them.

With investment options regulated, one has to be prudent with the money that is

contributed for the product and has to add value for the business to be successful. I feel

that both developed and developing markets understand the great value proposition that

unit-linked insurance plans offer. Another factor that tilts the balance in favour of such

products is the tax treatment that the accumulated account attracts. It’s tax-free, unlike a

mutual fund or any other investment, where the gains are taxed.

Riders

Riders are the additional benefits the company offers to the customer in addition to the

life coverage. The customer has to pay additional premium to get this benefit. However

the benefit of rider is optional, the client has full power to take or leave the riders.

There are five riders normally provided by the insurance companies and they are,5 riders-

terms riders, AD&D rider, critical-illness, critical illness pus or critical illness woman

rider. I can add or delete them (only after the 1st policy year) as my needs change

You can further customize your birla sun life insurance plan by adding riders to base plan

at a marginal extra cost.

1) Accidental death and dismemberment benefit rider. It provides 100% of coverage in

case of death due to accident; loss of more than one limb or sight in both the eyes

or in case of loss of one limb and loss of sight in one eye 50% coverage in case of

loss of one lib or sight in one eye.

2) Term rider: it provides additional amount of cover in the event of death of the life

insured.

3) Critical illness rider: it provides a cover in the event of life insured being diagnosed

as suffering from any of seventeen illnesses specified under the critical illness

plus rider.

4) Critical illness woman rider: it provides a cover against several critical illness

including woman specific illnesses, pregnancy complication and congenital

anomalies in a newborn child.

5) Waiver of premium: this rider waives payment of future premiums on the happening

of any of the unforeseen events as covered under this rider.

For rider deletion I am required to give a written intimation along with the policy

documents. For rider addition, my certificate on insurability and the receipt of payment of

rider premium will be needed (ride addition is subject to underwriting condition)

Marketing strategies: -

Birla sun life has adopted various marketing strategies to market its product. The

company has adapted to main strategies two main ways

.

1. Corporate agent:

Marketing through corporate agents is the traditional ways of marketing the

insurance products. Birla sun life also has huge number of agent spread all

over the country.

2. Banc assurance: -

Banc assurance is also a modern method of marketing insurance product in the

market. It is done in three ways. In banc assurance is a coming together of a bank and

insurance company to market the insurance product. The banks provide its customer data

or sell the insurance product to its customer.

1) Joint venture

2) Corporate agent

3) Customer base

Effective Banc assurance model

There are broadly three banc assurance models in operation globally

Distribution alliance

Joint venture between bank and insurer

Merger between banks and insurer

In joint venture bank and insurance company form a separate insurance company as in

the case on ICICI prudential life insurance?

in corporate agent module a bank act as an agent of the insurance company and sell

products to its customers . The bank gets commission for its service as in the case of LIC

and Corporation bank

in customer base the bank allow to sue its customer data and its premises to insurance

company to sell its products.

Birla sun life insurance Company has tied up with three bank to market its

products .they act as a corporate agent of the bank.

1) CITI BANK

2) IDBI BANK

3) KARUR VYSYA BANK

Among these three banks citi bank is the most active agent of the company .the company

also give various benefit to the customer of the citi bank. For e.g.:- if a normal customer

is above the age of 45 or the policy amount exceed the amount of rs15lacs then he is

required to submit FMR(FULL MEDICAL REPORT) .but for the customer of city bank

the limit is exceeded to rupees 20lacs .

Recently the company has decided to target the SME sector i.e. small-scale enterprise

To market this product. They have innovated new product. Basically for this the

company has decided to use industrial marketing strategies. The product innovated are

explained below

Mot of the partnership in India fall in to the first model, were banks have offered their

services as distribution channels for insurance products through their branch network. In

terms of present regulatory frame work banks have taken up corporate agency for

marketing insurance products for an agreed referral fee/commission.

Banc assurance in India is very much in its infancy. There are a wide variety of banks,

which are very different; both in make up, culture, geographic spread and working

practices. There are wide number of approaches and models that can be adopted for banc

assurance, many of which are dependent on this attributes, as well as the insurance

partner views and competencies, and also the nature of relationship between the bank and

insurer-whether one of equity sharing company structure, or of a profit share nature or

purely a distribution management.

The effective banc assurance model is the one, which helps, in pushing sales as well as

satisfying customer needs and helping banks to become a ‘One stop shop’. As a Banc

assurance model, if the bank is using distribution agreement model, it should, go in for an

exclusive agreement with an insurance company of repute. The reason being, while

signing up with multiple insurers you end up looking like a broker who is not committed

to ‘brand’ or a ‘product’ or a particular level of ‘service’, which is so vital for the growth

of Banc assurance. By signing an exclusive agreement with the insurer, the bank can put

the stamp of its own ‘Brand’ on the product without actually taking any risk. The bank

will thus be identified with the product it is selling and will be able to convince the

customer in a much better way. However, if the insurance market is not mature and there

is lack of creativity and innovation, even non-exclusive agreement is workable.

Sale of insurance products by the banks offers the following benefits:

It adds to the portfolio of retail products already offered by the banks.

It helps in building and packaging the existing core banking products like adding

deposit life insurance on a pure term deposit product.

Balances the less performing products.

It is a risk management device, since the fee increase earned on the sale of insurance

can be used to offset the loss on account of bad loans.

It helps in increasing customer loyalty since they have more reason than just the

banking to continue their relationship with the bank.

It helps bank to become a ‘one stop shop’ for all the financial needs of the customers

while it is banking insurance investments or state planning.

THE WORKING OF BANCASSURANCE

The distribution channel today for insurance products is widening. Increase in

distribution channels among others has also seen the concept of Banc assurance taking

roots in India, which is emerging to be a viable solution to mass selling of insurance

products. A popular concept in the West, Banc assurance put in simple terms means

selling insurance products through banks.

Wide network of branches

The Insurance Regulatory Development Authority (IRDA) has permitted banks to venture

into marketing insurance products on a risk participation basis. Banks need to possess at

least 500 crores of net worth and capital adequacy of a minimum of 10 per cent to make

an entry. Since banks have wide number of branches, distribution will be smoother.

Corporate clients

Banks can utilize their existing clientele, which includes corporate as well as retail clients

to market insurance products. Depending on the relationship with its clients it would

become easier to influence tile insurance purchase decisions of its clients. Customers too,

having banked with a particular bank for a long period repose a sense of trust and faith in

the bank.

Customer database

Customer database - raw information on the customers spending habits, investment

purchase, can prove to be a goldmine. Such information channelised in the right manner

can help work out marketing strategies and arrive at result-oriented decisions targeting

prospects.

Personalized Service

Since banks have direct contacts with customers, the service area can be tackled easily.

Customers, other than their day-to-day financial requirements can also get assistance for

premium payment, surrender, transfer of policies and many more.

Rural penetration

Penetration into the rural areas is easier for banks. Having been accustomed

to the customers' choices, banks are in a better position to understand the needs of the

customers and sell tailor made policies.

Cross-selling products

Banks in their normal course of functions lend finance in the form of loans for cars or for

buying a house. They can combine insurance products and sell as a package. In the

current scenario banks can cross sell their products along with the insurance products.

Fee based service

Insurance products can be sold as a fee based service. in which some broker charge

commission to policyholder against the insurance product , such as, selling of insurance

policy, different types of scheme ( ULIPS, endowment, personal accident, whole life,

money back policy and joint life policy ) etc.

Joint life policy is much suitable for fee based services to the insurance agents in the

insurance sectors. And now, in ULIPS are most benefited to insured persons as well as

insurer’s agents.

Cheaper than agents

Banc assurance may work out to be cheaper compared to companies appointing agents

for selling insurance products. This is particularly considering the banks wide network

and the reach they have compared to the agents.

"Integration of Banks and Insurance Companies is Likely to have a Longer Impact"

Insurance companies have been very slow to use the Web, for example, and their web

pages are among the poorest designed in the financial services industry in the US. France,

Canada has picked up banc assurance very fast whereas US, Japan has not. They've

lagged behind in the US for a number of reasons. Consumers don't see banks as a primary

source for insurance.

Consumers do not have a lot of confidence in banks' financial expertise outside of loans

and deposits. There are well-developed distribution channels for insurance that are

effective. Banks thought they could get "easy sales" by cross-selling insurance, forgetting

that:

They are not good cross-sellers,

The level of training required to sell insurance and the licensing requirements are far

heavier than what they're used to for selling other products, and

The banks have not, in most cases, put a strong emphasis on insurance sales. Annuities,

somewhat, more than other products.

The time taken to over come the sluggishness can also because of the reason that

functioning of banks and insurance companies are different from each other.

On the other hand, this integration of banks and insurance companies is likely to have a

longer impact. Over time, they will integrate increasingly as public perceptions change

and banks put more effort behind it. The insurance companies are trying the idea of

selling banking services. Some banks and insurance companies fear that this will lead to

higher growth and revenues but for those companies, which have not opted for banc

assurance, it will be an end.

I think it will be easier for the insurance companies to offer banking services than it will

be for the banks to offer insurance products. The insurance companies are more under

threat from industry consolidation and cost pressures within their own industries than

they are from bank/insurance company combinations at this point. The dream was that

the banks' customer-bases would be "ripe for picking", but the banks' sales and marketing

teams have not figured out how to make it work.

"For Banc assurance to be successful, the savings made on the distribution may have to

be passed on to the customer. Insurance companies need to design products specifically

for distributing through banks."

On usefulness of Banc assurance: Globally, there is a trend of convergence of all personal

finance services including insurance. In this scenario, it is possible for banks to

distribute some of the insurance products to their customers. It is possible for banks to

cross-sell insurance to their customers. Thus, the existing distribution network and the

existing customer-base of the banks are utilized for selling insurance. There will be

savings in distribution cost as well as customer acquisition cost. These savings will be

passed on to insurance seekers.

On new pricing issues: Marketing, especially the pricing may be the key issue. For

banc assurance to be successful, the savings made on the distribution may have to be

passed on to the customer. Insurance companies need to design products specifically

for distributing through banks. Trying to sell traditional insurance products may not

work.

On the success factors: The concept will succeed, as the customer is ultimately the same.

However, it may not work for traditional insurance products. It is right that the

functioning of banks and insurers is different. New products need to be designed

keeping in mind the functioning of banks and the needs of bank customers.

On the measures of strategies to be taken up by companies: Companies not opted for

Banc assurance could consider approaching or identifying the customers through

other channels. For example, a customer approaching a bank for home loan can be

offered Householder insurance policy through Banc assurance. However, other

insurers through a real estate developer or a real estate broker can offer the same

customer a Householder insurance policy.

On level of success in India: In India, the level of success could be high. Many banks

have entered the insurance sector through joint ventures and others have formed

alliances with Banks. These new companies will try to exploit the branch networks of

the banks. For example, Standard Chartered bank has already started selling personal

accident covers of Royal Sundaram Alliance Insurance Company to its credit card

holders.

On the competition between LIC and SBI :It is too early to comment. The strength of

LIC is their agent network. LIC is said to have over eight lakh agents. The strength of

SBI is their branch network. Traditionally, life insurance is best sold through agents,

while bank branches only supplement.

Other marketing and distribution channels

Internet

Though India is joining the fast growing breed of net users, using net for

transactions has not yet caught up. Though a few banks provide online banking,

the usage is still a small fragment. The insecurity associated with transactions

over the net is still an inhibiting factor.  At present most of the insurance

companies have product information and/or illustrative tools on the web.

We do not see the web evolving into a means for direct selling of

insurance in the current scenario.  In the Indian market, where insurance is sold

after considerable persuasion even after face-to-face selling, the selling over the

net, which must be initiated by the client, would take some more time.

While the technology capability is there, improvements in bandwidth and

infrastructure are needed.  Also needed are simpler products where auto-

underwriting is feasible.  Automobile insurance, one of the segments of

insurance purchased "off the shelf" in India, would be the ideal segment to start

with. On the life side, term assurance for standard lives with simplified

underwriting is a possibility.

These channels by themselves will not be able to overcome the mindset of the

people, but rather can only be enablers for the human channels.

Electronic Channels:

In the last decade, numbers of technological advances have taken

place due to immense use of EDI (Electronic Data Interchange)

�

LIC on Internet:

They have their own site, which is very informative. They display

information about them and its subsidiaries, the product they offer. The

addresses/e-mail Ids of their zonal offices, zonal training centers,

management development centers, overseas branches, Divisional offices

and also all Branch offices with a view to speed up the communication

process.

SMS:

SMS through mobile phone is recently new technology introduced by the

LIC to promote their product.

Advertising:

It is a paid form of non-personal communication. It is used to create

awareness and transmit information in order to gain a response from the

target market. Forms of advertising are as follows:

o News Papers and Magazines:

LIC give ads in the news papers and magazines round the year to

continue its brand image and also when new products are introduced.

Normally its ads are published in Times of India.

o Electronic media:

Insurance companies also advertise its services in the Electronic

media like:

Internet (Websites):

C o m p a n i e s l i k e L I C ( w w w . l i c i n d i a . c o m ) , I C I C I

(www.iciciprudential.com) all have websites from which people can get

the information about their products, prices, various schemes, and lots

of other information. People can also purchase the product through this

website.

Television:

Companies like LIC, Met Life India, advertise on television to make

people aware of their products and services.

Radio:

ICICI Prudential advertises on 92.5 red Fm.

Punch lines and logos:

It helps to create awareness about the brand among the target

audience. It also helps the company to convey its message to the

customer.

�

Disability Insurance.

Most of us insure our lives, effectively insuring that we will be able to provide income

for our families in event of our untimely death since we believe that we are doing

something reasonable to prevent any undue financial burden from affecting the lives of

our loved ones. Yet, most of us never insure a part of us that is much more important.

Not only can a disabled person not work but he or she has to undergo extensive medical

regimes while still incurring the daily costs of living. And health insurance is not enough

to circumvent the perils associated with permanent disability. A recent study conducted

abroad found that although 96 percent of seriously ill people had medical insurance over

a third of them lost everything that they owned and maintained owing to their disability.

After all, a disabled person still needs to eat and drink like the rest of normal human

society. Given the fact that he or she is disabled now requires extra care from the family

or paid professional help that eventually uses up the funds much beyond what they might

have earned. People may be put off by the price of disability insurance but the only

reason why the policy premiums are higher is because there is a much greater chance of

you actually needing the policy

Most of the Indian insurance policies have an in-built disability clause. So the next time

any agent tries to sell you a life insurance policy, do inquire more about the disability

clauses.

Also, check out the definition of ‘disabled’ in the policy that the agent offers since you

must be insured for your chosen occupation. At times, a disability may stop you from

working at your current job but still lets you perform other activities. Do verify if there is

coverage offered for partial disability since it could be the moot point between over-

taxing yourself and worsening your condition and being able to achieve the needful by

performing whatever amount of work seems prudent.

Also, look for a policy that holds a guarantee and is non-cancelable. Guaranteed

policies are policies where the payment stays fixed. Non-cancelable policies stay

in effect regardless of whatever that might happen and as long as the premium is

paid from time to time.

Finally, the last option to map is to calculate how much actual cover you may be

having currently or might need in the times to come. An insurance cover of Rs.1

lakh may have been adequate when you started working and earned Rs.3000 per

month. But it sure will be insufficient now that you have risen up in the world and

your salary has risen to over Rs.20000/- month.

Keep your interests in mind while choosing the insurance policy and you will never

regret it. After all, in the materialistically inclined times where we subsist, self-

centredness is the only truly justifiable prerogative in life

Please go through this list. It is designed as the starting point to help you make the right

choice while purchasing a life insurance policy. Answer the questions with your policy in

perspective and eliminate any conflicting doubts that might arise.

Is your life insurance so arranged that the proceeds stand exempted from the claims of

creditors, in case you have any? Will it stand against any judgment passed by a

court of law?

If and when desired, will the cash values of the insurance policy result in the largest

possible income for yourself?

In case, you have named your children as beneficiaries, do all of them participate? In

case your children are minors, can your expenses be correctly and swiftly

liquidated?

In case of an unexpected emergency, will the settlement provision prove sufficiently

flexible? Or will your benefactor’s interests be jeopardised?

Are all beneficiary designations correct and complete? Do your beneficiaries need to

be altered due to new family circumstances?

Is there a chance of your current life insurance policy being subject to probationary

delays or unnecessary additional expenses?

Do your grandchildren, if any obtain equal shares in your estate?

Are the beneficiary clauses formulated in a way that they perform your last wishes to

their fullest, with no violation whatsoever?

Will your spouse be guaranteed the most favourable income from the insurance

proceeds?

Is the extent to which your life insurance policy providing income absolutely clear in

your mind?

Can your spouse outlive the income provided?

Is your insurance policy arranged in a manner to create an income for your child’s

educational and marriage expenditure?

Shouldn’t you provide a cash fund for your spouse’s last expenses?

Have you taken full advantage of the best possible exemptions from tax?

Is the insurance policy so arranged that your spouse will be provided with similar

income advantages as yourself, if he or she outlives you?

Is there a chance of saving more if you opt to change the frequency of the payment of

premium?

Is there a non-forfeiture option provided? Would a change in the non-forfeiture option

be beneficial?

Would the proceeds of your life insurance policy be subject to double taxation if you

predecease your spouse?

Is the plan of distribution of your life insurance coordinated with your general

property?

Do you now own a substandard policy? If so, do the conditions that caused the extra

rating still exist?

Are there any "gaps" left in your "earning years"? For instance, your agent might go

on selling you short-term policies, all of them maturing between 50-55 years of

age. Eventually you will be resigned to a zero-insurance status when you actually

need it the most

There are no hard and fast rules, nor any easy formulae to help you decide how much life

insurance cover you need. However, there is a fairly straight forward approach which

each of us can follow.

Since life insurance is, first and foremost, financial security for your family, you can

judge how much money your family will need increase of your premature death and build

your insurance portfolio accordingly.

For instance, if you are contributing Rs.3,000 a month for meeting your family’s needs,

you must have a life insurance cover of around Rs.3 lakhs. In case of the policy holder’s

death the family can invest this amount in some absolutely safe investment avenue such

as government bonds, which pay 12% interest. The annual interest of Rs.36,000.

Additionally, the insurance portfolio could also include polices specifically earmarked for

the education and marriage of your children.

Income replacement is another approach to determine how much insurance one needs.

There are ways to figure it; two are discussed below:

1. Seventy-five percent solutions: Some observers believe that a family, particularly a

young one, needs about 75 percent of the take-home pay the insured would have

received until age sixty-five.

2. Five times solution: A second income replacement formula is to buy insurance equal

to five times your annual income less any insurance equal to five times your

annual income less any insurance already held. Suppose your annual income is

Rs.25, 000. Multiply this by 6 and it equals Rs.1,50,000. Now if you have Rs.

25,000 in-group life insurance, you need an additional Rs.1,25,000 (Rs.1,50,000

minus Rs.25,000) of life insurance.

Business insurance:-

Business insurance is a type of insurance which is taken out by the business concerns.

Every business house, small or large requires security for their business. For the security

and safety of their employee & employers, they require certain type of insurance which

will help them to preserve from the uncertainties arising in the business. A business

concerns include company, partnership or sole trading concern. Every business concern

take out insurance for there employee, key person etc.This help them to protect the

interest of their employees.

Business Insurance comprises of:

Key Person/man Insurance

Partnership Insurance

Employer- Employee Insurance

What is Key Person Insurance?

Key man insurance is a insurance taken out by the business concern to indemnify

himself from the loss which the may suffer in the event of death or loss of skill of the key

person, it can also be defined as Insurance taken by a Business Concern on the lives of

the Key Employees / Directors / Working Partners. Their Talent and Experience account

for much for the success of the Business Who cannot be easily replaced by virtue of their

long experience.

A Key Person is:

Key Executive

Key Employee

Whole Time Director

Working Partner Business Concern includes:

A business concern includes:-

Company – To insure key employees / directors

Partnership firm – To insure working partners/ Employees

Sole proprietor concern – To insure key employees, but not the sole proprietor

The risk arising from the death of key employee is as follows:-

Reduction in value of business

Decrease in sales and production

Impaired customer and supplier confidence

Weakened credit standing of business

Forced liquidation of business

Delay or termination of projects or future plans

Reduced Brand Value

Reduction of profits Replace loss of profits

Provide funds to recruit, hire, and train suitable replacement

Assure customers, creditors and employees of the continuity of the business

Pay a death benefit to the Key Person’s family

Reduction in profits

Hostile Takeovers

The benefits of key men insurance to particular business concern are as follows:

Replace loss of profits

Provide funds to recruit, hire, and train suitable replacement

Assure customers, creditors and employees of the continuity of the business

Pay a death benefit to the Key Person’s family

Ensure Liquidity

Create policy cash value which accumulates and can be used for emergency

business requirement or opportunity

Key Employee retirement / disability income

As explained earlier that the key man insurance is taken out by the business concern

to indemnify himself from the loss arise due to death of the key employee of the

company, the benefit of the key men insurance is enjoyed by the company himself.

Key person insurance is taken by a business concern for its own benefit and not for

the benefit of its employee / individual. The control of the key men insurance is also

with the company as the following right are with the company himself.

Premium is paid By the Business Concern

- It retains the right to the Policy

- Is eligible to receive the policy’s benefits

- On what basis can key person insurance be given?

- Holdings

- Contribution To Profits & Profile

- Documents Holdings

- In case of an entity, the key person should not hold;

- more than 50% individually, and

- more than 75% jointly with his family

- (Family includes spouse and minor children – when a minor becomes a major, then

he/ she is not a part of the family for this purpose)

- The above are more of a convention and not a rule or law.

- Contribution to the Profits & Profile

- Quantum of Insurance will depend on the key person’s contribution to the concern’s

profits keeping in mind

- His Qualifications

- Experience

- No. of key persons in the concern

- Documents - Profits & Compensation

- The cover for all the key persons in the concern will be limited to the least of ;

- 3 Times of Average PBDT ( Profit before Depreciation

- and Taxes) for the last 3 years

- 5 Times of Average Profit before Taxes ( PBT) - for the

- last 3 years

- Individual Key person’s cover limit

- Up to 8 times of the annual compensation of key person.

- Assume that the Key man’s annual compensation is Rs. 12 Lakhs and commission @

1% of the PAT.

- 3 Times of Average PBDT for the last 3 years = 280 + 250 + 200 X 3 = 730

3

- 5 Times of Average Profit before Taxes = 220 + 190 + 140 X 5 = 917

- for the last 3 years 3

- 8 times of the annual compensation = 12 + (1% of 139.5) X 8 = 107

- of key person

- The cover for all the key persons in the concern will be limited to 730

lakhs&individual Key person’s cover limit will be 107 lakhs.

- Where do you get the information on PBT & PBDT ?

Balance Sheet& P & L Statement:

- forming a part of the Company’s Annual Report

- Balance Sheet:

- Presents the snapshot of the company’s financial

- Position and reflects the sources and application of funds.

- Documents Required :

- Copy of Memorandum and Articles of Association

- Copy of Resolution of Board authorizing such insurance

- Copy of audited accounts for the last 3 years

- Key person Questionnaire

- I. T. returns of the Key person for the last 3 years

Plans & Policy Procedures:

- Flexi Save Plus, Flexi Life Line, Classic Life and Term Plan can be given

- Term and CI riders can be added

- Concern being the owner of the policy, nomination is not possible.

- Assignment can be made in favour of the key person, in case of the key person

leaving, can also be assigned in favour of

- new employer

- Tax Treatment

- Business concern, being the owner, can claim the premium paid as Business

expenditure under Sec 37 of the I. T. Act. – Circular No 762 dated 18th Feb 1998.

- (Eligibility for deduction would depend on facts of each case and the business

concern will have to provide commercial justification to income tax authorities

for availing of Premium paid by the concern not a perquisite in the hands of the

key person.

- Policy proceeds received will not be exempt under Sec. 10(10D)s of the I.T. Act.

- Policy proceeds received by the concern to be treated as business income and taxed

under Sec. 28 of I. T. Act.

- key person insurance)

- In case of Assignment in favor of key person, S.V. to be treated as perquisite. If S.V.

Is paid for by the key person, no immediate tax liability for the key person, but

purchase price to be treated as business concern’s revenue and taxed accordingly.

Tax Treatment

Business concern, being the owner, can claim the premium paid as Business

expenditure under Sec 37 of the I. T. Act. – Circular No 762 dated 18th Feb

1998. (Eligibility for deduction would depend on facts of each case and the

business concern will have to provide commercial justification to income tax

authorities for availing of key person insurance)

1. Premium paid by the concern not a perquisite in the hands of the key person.

2. Policy proceeds received will not be exempt under Sec. 10(10D)s of the I.T.

Act.

3. Policy proceeds received by the concern to be treated as business income and

taxed under Sec. 28 of I. T. Act.

Benefits of Key person policy:

Concern is indemnified in case of sudden death of the key person.

Corporate tax saving

A tool for retention of key person

Policy can be gifted to the key person as a recognition

Policy can be used as a collateral security

Withdrawals from the policy possible to meet any emergency

This is the various advantages which the company provide to its employee in

turn of the services, given to them as a customer made by his employee. Key Man

insurance gives a chance of confidence to the company as well as to the employee, to

work hard and acquire success in the business.

PARTNERSHIP INSURANCE

According to section 4 of Parternership is “The relationship between the people who

has agreed to share the profit of business carried on by all or any one of them acting

for all.Partership Insurance is their, where two or more persons come together and get

their sharing / business profit, which they acquire through trade, and invest in the

insurance as policy performance for future predictability, safety and security purpose.

In simple words it is a type of insurance taken by a partnership firm on the lives of

partners.

What is the objective?

1. It allows predictability, safety and security to the partnership firm.

2. It is useful to protect their business from the various factor of risk.

3. It provides the central trust/mutual understanding from beginning process to ending

process towards partnership firm.

1. To enable the partnership firm / remaining partners to buy the deceased partner’s

share without disturbing the firm’s financial position.

Insurable Interest:

A partnership firm has an insurable interest in the lives of its partners to the extent

of purchase money ( capital and goodwill ) required to be paid in respect of share of

each partner

Qualifying Conditions:

1. If partners are so related that one partner is the sole legal heir of the other partner,

then partnership insurance cannot be considered

1. All partners must be insured unless they are uninsurable on medical or age grounds

1. The partnership deed should contain a clause that the partnership is revocable

definitely in the case of demise of a partner

Documents Required:

Normal medical requirements for individual partner’s application

Copy of original and supplementary partnership deed

Consent letter to place an endorsement on the policy

Copy of I.T. returns for the last 3 years.

Copy of Audited accounts for the last 3 years.

Policy Procedures:

Policy to be endorsed stating that in case of dissolution of firm for reason

other than death of partner, the policy will either be surrendered or absolutely

assigned in favor of the insured partner. The following are the points to be

considered:

1. Firm being the owner of policy, nomination is not possible

2. Assignment, except in case of dissolution of firm not allowed

Tax Treatment:

Insurance premium paid by the firm to be treated as business expense under Sec. 37

of Income Tax act

Policy proceeds will be treated as income of the firm

Benefits of Partnership Insurance:

Takes care of financial insecurity in the event of a partner’s death.

Promotes a firm’s life

Tax benefits to the firm

Financial stability.

Survival benefit.

Mutual understanding.

EMPLOYER-EMPLOYEE SCHEME

What is Employer – Employee Insurance Scheme?

Insurance taken by an employer on the life of an employee for the benefit of the

employee. Every company takes out insurance for his employee. The insurance taken

out is in huge number and the insurance company sees the employer employee

insurance as a big market for their business and has invented this product.

What is the objective?

1. To enable an enlightened employer to provide for insurance for the benefit of a loyal

employee.

2. Employer has an insurable interest on the life of an employee

What are the options available?

1. Application is completed by the employee;

- Application to be accompanied by a letter from the employer committing to pay

the premium

1. Application is signed by the employer’s authorized person

- Application to be accompanied by a letter from the employer stating the

object of insurance, restrictions imposed regarding loan, surrender, etc., and that the

policy would be immediately assigned in favour of the employee.

Tax Treatment:

Premium paid by the employer to be treated as business expense in the

employer’s books

Premium paid by the employer to be treated as perquisite in the hands of

employee under Sec. 17 of I. T. Act.

Employee can claim I. T. rebate under Sec. 88

Policy proceeds exempt under Sec.10 (10D)

Benefits of Employer – Employee Insurance:

Employer earns loyalty of employee /s

Employee gets benefits of life insurance

Tax benefits to employer and employee /s

Motivation of the employee.

Mutual –understanding among the employees.

Participative management.

Micro insurance:-

Micro insurance is one of the biggest and advance innovations in the

insurance sector of India. As the majority of the population living in the rural areas

and the majority of the population below poverty lines. The insurance company with

a view to target this section of the society, has designed the product which the poor

people will be capable to purchase.

In micro insurance the face value of the policy will be very low i.e. is

Rs25000 and the premium will be payable on weekly basis instead of

monthly,quaterly,or yearly basis .the premium of the 25,000 on weekly will be Rs150

only which the poor people can afford. In this way the insurance will be able to cover

this section of the section which consists of the biggest part of the market. The LIC

has already introduce micro insurance in the market before 2 months

Conclusion:-

In the end we reach to the conclusion that the insurance industry has witnessed

a huge amount of innovation after the privatization of the insurance sector. the

privatization has facilitated the entry of foreign and private players to the industry,

due to which the competition in the insurance market has became very severe and in

order to attract the customer and to retain the customer the insurance company has

introduce various new product. Again the majority of the potential customers are

unaware of the insurance companies and with a view to increase the aware the

insurance companies has innovated the new marketing channels.

Again the e need of the customer in the present world has increase a lot due to

increasing uncertainty in the present world. And to meet their requirement of the

insurance the companies are designing multi benefit products.

CONTENT

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Insurance From Wikipedia, the free encyclopedia

Jump to: navigation, searchThis article is about the risk management method. For insurance in blackjack, see Blackjack.

Financial market participants

�• Credit unions Insurance companies Investment banks Investment funds

Pension funds Prime brokers Trusts• Finance Financial market Participants Corporate finance Personal finance

Public finance Banks and banking Financial regulation• v t e

Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange for payment. It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. An insurer, or insurance carrier, is a company selling the insurance; the insured, or policyholder, is the person or entity buying the insurance policy. The amount of money to be charged for a certain amount of insurance coverage is called the premium. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice.The 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 (indemnify) the insured in the case of a financial (personal) loss. The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insured will be financially compensated.

Contents  [hide] 1 History

1.1 Early methods 1.2 Modern insurance

2 Principles 2.1 Insurability 2.2 Legal 2.3 Indemnification

3 Societal effects 3.1 Methods of insurance

4 Insurers' business model 4.1 Underwriting and investing 4.2 Claims 4.3 Marketing

5 Types of insurance 5.1 Auto insurance

5.1.1 Gap insurance 5.2 Health insurance 5.3 Accident, sickness, and unemployment insurance 5.4 Casualty 5.5 Life

5.5.1 Burial insurance 5.6 Property 5.7 Liability 5.8 Credit 5.9 Other types 5.10 Insurance financing vehicles 5.11 Closed community self-insurance

6 Insurance companies 7 Across the world

7.1 Regulatory differences 8 Controversies

8.1 Insurance insulates too much 8.2 Complexity of insurance policy contracts 8.3 Limited consumer benefits 8.4 Redlining 8.5 Insurance patents 8.6 The insurance industry and rent-seeking 8.7 Religious concerns

9 See also 10 Notes 11 Bibliography 12 External links

History[edit] Main article: History of insuranceEarly methods[edit]

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Merchants have sought methods to minimize risks since early times. Pictured, Governors of the Wine Merchant's Guild by Ferdinand Bol, c. 1680.

Methods for transferring or distributing risk were practiced by Chinese and Babylonian traders as long ago as the 3rd and 2nd millennia BC, respectively.[1] Chinese merchants travelling treacherous river rapids would redistribute their wares across many vessels to limit the loss due to any single vessel's capsizing. The Babylonians developed a system which was recorded in the famous Code of Hammurabi, c. 1750 BC, and practiced by early Mediterranean sailing merchants. If a merchant received a loan to fund his shipment, he would pay the lender an additional sum in exchange for the lender's guarantee to cancel the loan should the shipment be stolen or lost at sea.At some point in the 1st millennium BC, the inhabitants of Rhodes created the 'general average'. This allowed groups of merchants to pay to insure their goods being shipped together. The collected premiums would be used to reimburse any merchant whose goods were jettisoned during transport, whether to storm or sinkage.[2]

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[edit]Insurance became far more sophisticated in Enlightenment era Europe, and specialized varieties developed.

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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".[4] 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.[5]

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 centre 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.[6]

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Leaflet promoting the National Insurance Act 1911.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.[7][8] Edward Rowe Mores established the Society for Equitable Assurances on Lives and Survivorship in 1762.It was the world's first mutual insurer and it pioneered age based premiums based on mortality rate laying "the framework for scientific insurance practice and development" and "the basis of modern life assurance upon which all life assurance schemes were subsequently based".[9]

In the late 19th century, "accident insurance" began to become available. This operated much like modern disability insurance.[10][11] The first company to offer accident insurance was the Railway Passengers Assurance Company, formed in 1848 in England to insure against the rising number of fatalities on the nascent railway system.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.[12][13] In Britain more extensive legislation was introduced by the Liberal government in the 1911 National Insurance Act. This gave the British working classes the first contributory system of insurance against illness and unemployment.[14] This system was greatly expanded after the Second World War under the influence of the Beveridge Report, to form the first modern welfare state.[12][15]

Principles[edit] 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 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.[16]

Insurability[edit]Main article: InsurabilityRisk which can be insured by private companies typically shares seven common characteristics:[17]

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. Capital constrains 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[edit]When a company insures an individual entity, there are basic legal requirements and regulations. Several commonly cited legal principles of insurance include:[18]

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[edit]Main article: IndemnityTo "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[19] 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.[19][20]

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.Societal effects[edit] 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

moral hazard to refer to increased risk due to intentional carelessness or indifference.[21] 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.[22]

Methods of insurance[edit]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

coverage3 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

Insurers' business model[edit]

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Accidents will happen (William H. Watson, 1922) is a slapstick silent film about the methods and mishaps of an insurance broker. Collection EYE Film Institute Netherlands.Underwriting and investing[edit]

The business model is to collect more in premium and investment income than is paid out in losses, and to also offer a competitive price which consumers will accept. Profit can be reduced to a simple equation:Profit = earned premium + investment income – incurred loss – underwriting expenses.Insurers make money in two ways:

• Through underwriting, the process by which insurers select the risks to insure and decide how much in premiums to charge for accepting those risks

• By investing the premiums they collect from insured parties The most complicated aspect of the insurance business is the actuarial science of ratemaking (price-setting) of policies, which uses statistics and probability to approximate the rate of future claims based on a given risk. After producing rates, the insurer will use discretion to reject or accept risks through the underwriting process.At the most basic level, initial ratemaking involves looking at the frequency and severity of insured perils and the expected average payout resulting from these perils. Thereafter an insurance company will collect historical loss data, bring the loss data to present value, and compare these prior losses to the premium collected in order to assess rate adequacy.[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. The Association of British Insurers (gathering 400 insurance companies and 94% of UK insurance services) has almost 20% of the investments in the London Stock Exchange.[25]

In the United States, the underwriting loss of property and casualty insurance companies was $142.3 billion in the five years ending 2003. But overall profit for the same period was $68.4 billion, as the result of float. Some insurance industry insiders, most notably 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 depressed period. Bear markets do cause insurers to shift away from investments and to toughen up their underwriting standards, so a poor economy generally means high insurance premiums. This tendency to swing between profitable and unprofitable periods over time is commonly known as the underwriting, or insurance, cycle.[26]

Claims[edit]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[edit]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.[27]

Types of insurance[edit] 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 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.[28]

Auto insurance[edit]Main article: Vehicle insurance

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A wrecked vehicle in CopenhagenAuto 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[edit]Main article: Gap insuranceGap 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 companies 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 your finance company when you first purchase your vehicle. Most auto insurance companies offer this coverage to consumers as well. If you are unsure if GAP coverage had been purchased, you should check your vehicle lease or purchase documentation.Health insurance[edit]Main articles: Health insurance and Dental insurance

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Great Western Hospital, SwindonHealth 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.Accident, sickness, and unemployment insurance[edit]

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Workers' compensation, or employers' liability insurance, is compulsory in some countries

• Disability insurance policies provide financial support in the event of the policyholder becoming unable to work because of disabling illness or injury. It provides monthly support to help pay such obligations as mortgage loans and credit cards. Short-term and long-term disability policies are available to individuals, but considering the expense, long-term policies are generally obtained only by those with at least six-figure incomes, such as doctors, lawyers, etc. Short-term disability insurance covers a person for a period typically up to six months, paying a stipend each month to cover medical bills and other necessities.

• Long-term disability insurance covers an individual's expenses for the long term, up until such time as they are considered permanently disabled and thereafter. 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 wages lost and accompanying medical expenses incurred because of a job-related injury.

Casualty[edit]Main article: Casualty insuranceCasualty 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.

• 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 political conditions could result in a loss.

Life[edit]Main article: Life insurance

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Amicable Society for a Perpetual Assurance Office, Serjeants' Inn, Fleet Street, London, 1801

Life insurance provides a monetary benefit to a decedent's family or other designated beneficiary, and may specifically provide for income to an insured person's family, burial, funeral and other final expenses. Life insurance policies often allow the option of having the proceeds paid to the beneficiary either in a lump sum cash payment or an annuity. In most states, a person cannot purchase a policy on another person without their knowledge.Annuities provide a stream of payments and are generally classified as insurance because they are issued by insurance companies, are regulated as insurance, and require the same kinds of actuarial and investment management expertise that life insurance requires. Annuities and pensions that pay a benefit for life are sometimes regarded as insurance against the possibility that a retiree will outlive his or her financial resources. In that sense, they are the complement of life insurance and, from an underwriting perspective, are the mirror image of life insurance.Certain life insurance contracts accumulate cash values, which may be taken by the insured if the policy is surrendered or which may be borrowed against. Some policies, such as annuities and endowment policies, are financial instruments to accumulate or liquidate wealth when it is needed.In many countries, such as the 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[edit]Burial insurance is a very old type of life insurance which is paid out upon death to cover final expenses, such as the cost of a funeral. The Greeks and Romans introduced burial insurance c. 600 CE when they organized guilds called "benevolent societies" which cared for

the surviving families and paid funeral expenses of members upon death. Guilds in the Middle Ages served a similar purpose, as did friendly societies during Victorian times.Property[edit]Main article: Property insurance

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This tornado damage to an Illinois home would be considered an "Act of God" for insurance purposes

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:

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US Airways Flight 1549 was written off after ditching into the Hudson River• Aviation insurance protects aircraft hulls and spares, and

associated liability risks, such as passenger and third-party liability. Airports may also appear under this subcategory, including air traffic control and refuelling operations for international airports through to smaller domestic exposures.

• Boiler insurance (also known as boiler and machinery insurance, or equipment breakdown insurance) insures against accidental physical damage to boilers, equipment or machinery.

• Builder's risk insurance insures against the risk of physical loss or damage to property during construction. Builder's risk insurance is typically written on an "all risk" basis covering damage arising from any cause (including the negligence of the insured) not otherwise expressly excluded. Builder's risk insurance is coverage that protects a person's or organization's insurable interest in materials, fixtures 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.[29]

• 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.[30]

• 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.

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Hurricane Katrina caused over $80 billion of storm and flood damage• Flood insurance protects against property loss due to flooding.

Many U.S. insurers do not provide flood insurance in some parts of the country. In response to this, the federal government created the National Flood Insurance Program which serves as the insurer of last resort.

• Home insurance, also commonly called hazard insurance or homeowners insurance (often abbreviated in the real estate industry as HOI), provides coverage for damage or destruction of the policyholder's home. In some geographical areas, the policy may exclude certain types of risks, such as flood or earthquake, that require additional coverage. Maintenance-related issues are typically the homeowner's responsibility. The policy may include inventory, or this can be bought as a separate policy, especially for people who rent housing. In some countries, insurers offer a package which may include liability and legal responsibility for injuries and property damage caused by members of the household, including pets.[31]

• 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 principal.

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The demand for terrorism insurance surged after 9/11• 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).

• 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 as hurricanes.

Liability[edit]Main article: Liability insuranceLiability 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.

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The subprime mortgage crisis was the source of many liability insurance losses• Public 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 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 malpractice insurance.

Credit[edit]Main article: Payment protection insuranceCredit insurance repays some or all of a loan when certain circumstances arise to the borrower such as unemployment, disability, or death.

• 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.

Other types[edit]• 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.[32] In car insurance, all-risk policy includes also the damages caused by the own driver.

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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 insurance covers the loss of income, and the expenses incurred, after a covered peril interrupts normal business operations.

• Collateral protection insurance (CPI) insures property (primarily vehicles) held as collateral for loans made by lending institutions.

• 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.

• 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.

• 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 and 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 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.

• 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[edit]• Fraternal insurance is provided on a cooperative basis by

fraternal benefit societies or other social organizations.[33]

• 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 the welfare state. This is a large, complicated topic that engenders tremendous debate, which can be further studied in the following articles (and others):

• National Insurance • Social safety net • Social security • Social Security debate (United States) • Social Security (United States) • Social welfare provision

• 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 self-insurance[edit]

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 some Muslim groups, depend on support provided by their 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 and may have disappeared altogether.Insurance companies[edit]

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Certificate issued by Republic Fire Insurance Co. of New York c. 1860Insurance companies may be classified into two groups:

• Life insurance companies, which sell life insurance, annuities and pensions products.

• Non-life or property/casualty insurance companies, which sell other types of insurance.

General insurance companies can be further divided into these sub categories.

• Standard lines • Excess lines

In most countries, life and non-life insurers are subject to different regulatory regimes and different tax and accounting rules. The main reason for the distinction between the two types of company is that life, annuity, and pension business is very long-term in nature – coverage for life assurance or a pension can cover risks over many decades. By contrast, non-life insurance cover usually covers a shorter period, such as one year.In the United States, standard line insurance companies are insurers that have received a license or authorization from a state for the purpose of writing specific kinds of insurance in that state, such as automobile insurance or homeowners' insurance.[34] They are typically referred to as "admitted" insurers. Generally, such an insurance company must submit its rates and policy forms to the state's insurance regulator to receive his or her prior approval, although whether an insurance company must receive prior approval depends upon the kind of insurance being written. Standard line insurance companies usually charge lower premiums than excess line insurers and may sell directly to individual insureds. They are regulated by state laws, which include restrictions on rates and forms, and which aim to protect consumers and the public from unfair or abusive practices.[34] These insurers also are required to contribute to state guarantee funds, which are used to pay for losses if an insurer becomes insolvent.[34]

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The subscription room at Lloyd's of London in the early 19th century.Excess line insurance companies (also known as Excess and Surplus) typically insure risks not covered by the standard lines insurance market, due to a variety of reasons (e.g., new entity or an entity that does not have an adequate loss history, an entity with unique risk characteristics, or an entity that has a loss history that does not fit the underwriting requirements of the standard lines insurance market).[34] They are typically referred to as non-admitted or unlicensed insurers.[34] Non-admitted insurers are generally not licensed or authorized in the states in which they write business, although they must be licensed or authorized in the state in which they are domiciled.[34] These companies have more flexibility and can react faster than standard line insurance companies because they are not required to file rates and forms.[34] However, they still have substantial regulatory requirements placed upon them.Most states require that excess line insurers submit financial information, articles of incorporation, a list of officers, and other general information.[34] They also may not write insurance that is typically available in the admitted market, do not participate in state guarantee funds (and therefore policyholders do not have any recourse through these funds if an insurer becomes insolvent and cannot pay claims), may pay higher taxes, only may write coverage for a risk if it has been rejected by three different admitted insurers, and only when the insurance producer placing the business has a surplus lines license.[34] Generally, when an excess line insurer writes a policy, it must, pursuant to state laws, provide disclosure to the

policyholder that the policyholder's policy is being written by an excess line insurer.[34]

On July 21, 2010, President Barack Obama signed into law the Nonadmitted and Reinsurance Reform Act of 2010 ("NRRA"), which took effect on July 21, 2011, and was part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The NRRA changed the regulatory paradigm for excess line insurance. Generally, under the NRRA, only the insured's home state may regulate and tax the excess line transaction.[35]

Insurance companies are generally classified as either mutual or proprietary companies.[36] 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.Other possible forms for an insurance company include reciprocals, in which policyholders reciprocate in sharing risks, and Lloyd's organizations.Insurance companies are rated by various agencies such as A. M. 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.Reinsurance companies are insurance companies that sell policies to other insurance companies, allowing them to reduce their risks and protect themselves from very large losses. The reinsurance market is dominated by a few very large companies, with huge reserves. A reinsurer may also be a direct writer of insurance risks as well.Captive insurance companies may be defined as limited-purpose insurance companies established with the specific objective of financing risks emanating from their parent group or groups. This definition can sometimes be extended to include some of the risks of the parent company's customers. In short, it is an in-house self-insurance vehicle. Captives may take the form of a "pure" entity (which is a 100% subsidiary of the self-insured parent company); of a

"mutual" captive (which insures the collective risks of members of an industry); and of an "association" captive (which self-insures individual risks of the members of a professional, commercial or industrial association). Captives represent commercial, economic and tax advantages to their sponsors because of the reductions in costs they help create and for the ease of insurance risk management and the flexibility for cash flows they generate. Additionally, they may provide coverage of risks which is neither available nor offered in the traditional insurance market at reasonable prices.The types of risk that a captive can underwrite for their parents include property damage, public and product liability, professional indemnity, employee benefits, employers' liability, motor and medical aid expenses. The captive's exposure to such risks may be limited by the use of reinsurance.Captives are becoming an increasingly important component of the risk management and risk financing strategy of their parent. This can be understood against the following background:

• Heavy and increasing premium costs in almost every line of coverage

• Difficulties in insuring certain types of fortuitous risk • Differential coverage standards in various parts of the world • Rating structures which reflect market trends rather than

individual loss experience• Insufficient credit for deductibles and/or loss control efforts

There are also companies known as "insurance consultants". Like a mortgage broker, these companies are paid a fee by the customer to shop around for the best insurance policy amongst many companies. Similar to an insurance consultant, an 'insurance broker' also shops around for the best insurance policy amongst many companies. However, with insurance brokers, the fee is usually paid in the form of commission from the insurer that is selected rather than directly from the client.Neither insurance consultants nor insurance brokers are insurance companies and no risks are transferred to them in insurance transactions. Third party administrators are companies that perform underwriting and sometimes claims handling services for insurance companies. These companies often have special expertise that the insurance companies do not have.

The financial stability and strength of an insurance company should be a major consideration when buying an insurance contract. An insurance premium paid currently provides coverage for losses that might arise many years in the future. For that reason, the viability of the insurance carrier is very important. In recent years, a number of insurance companies have become insolvent, leaving their policyholders with no coverage (or coverage only from a government-backed insurance pool or other arrangement with less attractive payouts for losses). A number of independent rating agencies provide information and rate the financial viability of insurance companies.Across the world[edit]

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Life insurance premiums written in 2005

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Non-life insurance premiums written in 2005Global insurance premiums grew by 2.7% in inflation-adjusted terms in 2010 to $4.3 trillion, climbing above pre-crisis levels. The return to growth and record premiums generated during the year followed two years of decline in real terms. Life insurance premiums increased by 3.2% in 2010 and non-life premiums by 2.1%. While industrialised countries saw an increase in premiums of around 1.4%, insurance markets in emerging economies saw rapid expansion with 11% growth in premium income. The global insurance industry was sufficiently capitalised to withstand the financial crisis of 2008 and 2009 and most insurance companies restored their capital to pre-crisis levels by the end of 2010. With the continuation of the gradual

recovery of the global economy, it is likely the insurance industry will continue to see growth in premium income both in industrialised countries and emerging markets in 2011.Advanced economies account for the bulk of global insurance. With premium income of $1.62 trillion, Europe was the most important region in 2010, followed by North America $1.409 trillion and Asia $1.161 trillion. Europe has however seen a decline in premium income during the year in contrast to the growth seen in North America and Asia. The top four countries generated more than a half of premiums. The United States and Japan alone accounted for 40% of world insurance, much higher than their 7% share of the global population. Emerging economies accounted for over 85% of the world's population but only around 15% of premiums. Their markets are however growing at a quicker pace.[37] The country expected to have the biggest impact on the insurance share distribution across the world is China. According to Sam Radwan of ENHANCE International LLC, low premium penetration (insurance premium as a % of GDP), an ageing population and the largest car market in terms of new sales, premium growth has averaged 15–20% in the past five years, and China is expected to be the largest insurance market in the next decade or two.[38]

Regulatory differences[edit]Main article: Insurance lawIn the United States, insurance is regulated by the states under the McCarran-Ferguson Act, with "periodic proposals for federal intervention", and a nonprofit coalition of state insurance agencies called the National Association of Insurance Commissioners works to harmonize the country's different laws and regulations.[39] The National Conference of Insurance Legislators (NCOIL) also works to harmonize the different state laws.[40]

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.[41] As far as insurance in the United Kingdom, the Financial Services Authority took over insurance regulation from the General Insurance Standards Council

in 2005;[42] laws passed include the Insurance Companies Act 1973 and another in 1982,[43] and reforms to warranty and other aspects under discussion as of 2012.[44]

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[45] 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.[46]

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.Controversies[edit] Insurance insulates too much[edit]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. To reduce their own financial exposure, insurance companies have contractual clauses that mitigate their obligation to provide coverage if the insured engages in behavior that grossly magnifies their risk of loss or liability.[citation needed]

For example, life insurance companies may require higher premiums or deny coverage altogether to people who work in hazardous occupations or engage in dangerous sports. Liability insurance providers do not provide coverage for liability arising from intentional torts committed by or at the direction of the insured. Even if a provider desired to provide such coverage, it is against the public policy of most countries to allow such insurance to exist, and thus it is usually illegal.[citation needed]

Complexity of insurance policy contracts[edit]

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9/11 was a major insurance loss, but there were disputes over the World Trade Center's insurance policyInsurance 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 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 towards encouraging an insured to purchase more insurance than might be necessary at a higher price. A broker generally holds

contracts with many insurers, thereby allowing the broker to "shop" the market for the best rates and coverage possible.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 sales 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 and/or agents. However, such a consultant must still work through brokers and/or agents in order to secure coverage for their clients.Limited consumer benefits[edit]In United States, economists and consumer advocates generally consider insurance to be worthwhile for low-probability, catastrophic losses, but not for high-probability, small losses. Because of this, consumers are advised to select high deductibles and to not insure losses which would not cause a disruption in their life. However, consumers have shown a tendency to prefer low deductibles and to prefer to insure relatively high-probability, small losses over low-probability, perhaps due to not understanding or ignoring the low-probability risk. This is associated with reduced purchasing of insurance against low-probability losses, and may result in increased inefficiencies from moral hazard.[47]

Redlining[edit]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.[48]

In July 2007, The 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.[49] The report was disputed by representatives of the Consumer Federation of America, the National Fair Housing Alliance, the National Consumer Law Center, and the Center for Economic Justice, for relying on data provided by the insurance industry.[50]

All states have provisions in their rate regulation laws or in their fair trade practice acts that prohibit unfair discrimination, often called redlining, in setting rates and making insurance available.[51]

In determining premiums and premium rate structures, insurers consider quantifiable factors, including location, credit scores, gender, occupation, marital status, and education level. However, the use of such factors is often considered to be unfair or unlawfully discriminatory, and the reaction against this practice has in some instances led to political disputes about the ways in which insurers determine premiums and regulatory intervention to limit the factors used.An insurance underwriter's job is to evaluate a given risk as to the likelihood that a loss will occur. Any factor that causes a greater likelihood of loss should theoretically be charged a higher rate. This basic principle of insurance must be followed if insurance companies are to remain solvent.[citation needed] Thus, "discrimination" against (i.e., negative differential treatment of) potential insureds in the risk evaluation and premium-setting process is a necessary by-product of the fundamentals of insurance underwriting. For instance, insurers charge older people significantly higher premiums than they charge younger people for term life insurance. Older people are thus treated

differently from younger people (i.e., a distinction is made, discrimination occurs). The rationale for the differential treatment goes to the heart of the risk a life insurer takes: Old people are likely to die sooner than young people, so the risk of loss (the insured's death) is greater in any given period of time and therefore the risk premium must be higher to cover the greater risk. However, treating insureds differently when there is no actuarially sound reason for doing so is unlawful discrimination.Insurance patents[edit]Further information: Insurance patentNew 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 auto insurance. Early versions were independently invented and patented by a major US auto insurance company, Progressive Auto Insurance (U.S. Patent 5,797,134) and a Spanish independent inventor, Salvador Minguijon Perez (EP 0700009).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.[52]

Inventors can now have their insurance US patent applications reviewed by the public in the Peer to Patent program.[53] The first insurance patent application to be posted was US2009005522 "risk assessment company". It was posted on March 6, 2009. This patent application describes a method for increasing the ease of changing insurance companies.[54]

The insurance industry and rent-seeking[edit]Certain insurance products and practices have been described as rent-seeking by critics.[citation needed] That is, some insurance products or practices are useful primarily because of legal benefits, such as reducing taxes, as opposed to providing protection against risks of adverse events. Under United States tax law, for example, most owners of variable annuities and variable life insurance can invest their premium payments in the stock market and defer or eliminate paying any taxes on their investments until withdrawals are made. Sometimes this tax deferral is the only reason people use these products.[citation needed] Another example is the legal infrastructure which allows life insurance to be held in an irrevocable trust which is used to pay an estate tax while the proceeds themselves are immune from the estate tax.Religious concerns[edit]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[55] (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.[56]

Jewish rabbinical scholars also have expressed reservations regarding insurance as an avoidance of God's will but most find it acceptable in moderation.[57]

Some Christians believe insurance represents a lack of faith[citation needed] 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.[58][59][60]

Insurance From Wikipedia, the free encyclopedia

Jump to: navigation, searchThis article is about the risk management method. For insurance in blackjack, see Blackjack.

Financial market participants

�• Credit unions Insurance companies Investment banks Investment funds

Pension funds Prime brokers Trusts• Finance Financial market Participants Corporate finance Personal finance

Public finance Banks and banking Financial regulation• v t e

Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange for payment. It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. An insurer, or insurance carrier, is a company selling the insurance; the insured, or policyholder, is the person or entity buying the insurance policy. The amount of money to be charged for a certain amount of insurance coverage is called the premium. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice.The 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 (indemnify) the insured in the case of a financial (personal) loss. The insured receives a contract, called the insurance policy, which details the

conditions and circumstances under which the insured will be financially compensated.

Contents  [hide] 1 History

1.1 Early methods 1.2 Modern insurance

2 Principles 2.1 Insurability 2.2 Legal 2.3 Indemnification

3 Societal effects 3.1 Methods of insurance

4 Insurers' business model 4.1 Underwriting and investing 4.2 Claims 4.3 Marketing

5 Types of insurance 5.1 Auto insurance

5.1.1 Gap insurance 5.2 Health insurance 5.3 Accident, sickness, and unemployment insurance 5.4 Casualty 5.5 Life

5.5.1 Burial insurance 5.6 Property 5.7 Liability 5.8 Credit 5.9 Other types 5.10 Insurance financing vehicles 5.11 Closed community self-insurance

6 Insurance companies 7 Across the world

7.1 Regulatory differences 8 Controversies

8.1 Insurance insulates too much 8.2 Complexity of insurance policy contracts 8.3 Limited consumer benefits 8.4 Redlining 8.5 Insurance patents

8.6 The insurance industry and rent-seeking 8.7 Religious concerns

9 See also 10 Notes 11 Bibliography 12 External links

History[edit] Main article: History of insuranceEarly methods[edit]

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Merchants have sought methods to minimize risks since early times. Pictured, Governors of the Wine Merchant's Guild by Ferdinand Bol, c. 1680.

Methods for transferring or distributing risk were practiced by Chinese and Babylonian traders as long ago as the 3rd and 2nd millennia BC, respectively.[1] Chinese merchants travelling treacherous river rapids would redistribute their wares across many vessels to limit the loss due to any single vessel's capsizing. The Babylonians developed a system which was recorded in the famous Code of Hammurabi, c. 1750 BC, and practiced by early Mediterranean sailing merchants. If a merchant received a loan to fund his shipment, he would pay the lender an additional sum in exchange for the lender's guarantee to cancel the loan should the shipment be stolen or lost at sea.At some point in the 1st millennium BC, the inhabitants of Rhodes created the 'general average'. This allowed groups of merchants to pay to insure their goods being shipped together. The collected premiums would be used to reimburse any merchant whose goods were jettisoned during transport, whether to storm or sinkage.[2]

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[edit]Insurance became far more sophisticated in Enlightenment era Europe, and specialized varieties developed.

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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".[4] 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.[5]

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 centre 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.[6]

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Leaflet promoting the National Insurance Act 1911.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.[7][8] Edward Rowe Mores established the Society for Equitable Assurances on Lives and Survivorship in 1762.It was the world's first mutual insurer and it pioneered age based premiums based on mortality rate laying "the framework for scientific insurance practice and development" and "the basis of modern life assurance upon which all life assurance schemes were subsequently based".[9]

In the late 19th century, "accident insurance" began to become available. This operated much like modern disability insurance.[10][11]

The first company to offer accident insurance was the Railway Passengers Assurance Company, formed in 1848 in England to insure against the rising number of fatalities on the nascent railway system.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.[12][13] In Britain more extensive legislation was introduced by the Liberal government in the 1911 National Insurance Act. This gave the British working classes the first contributory system of insurance against illness and unemployment.[14] This system was greatly expanded after the Second World War under the influence of the Beveridge Report, to form the first modern welfare state.[12][15]

Principles[edit] 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 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.[16]

Insurability[edit]Main article: InsurabilityRisk which can be insured by private companies typically shares seven common characteristics:[17]

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. Capital constrains 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[edit]When a company insures an individual entity, there are basic legal requirements and regulations. Several commonly cited legal principles of insurance include:[18]

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[edit]Main article: IndemnityTo "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[19]

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.[19][20]

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.Societal effects[edit] 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 moral hazard to refer to increased risk due to intentional carelessness or indifference.[21] 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.[22]

Methods of insurance[edit]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

coverage3 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

Insurers' business model[edit]

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Accidents will happen (William H. Watson, 1922) is a slapstick silent film about the methods and mishaps of an insurance broker. Collection EYE Film Institute Netherlands.Underwriting and investing[edit]The business model is to collect more in premium and investment income than is paid out in losses, and to also offer a competitive price which consumers will accept. Profit can be reduced to a simple equation:Profit = earned premium + investment income – incurred loss – underwriting expenses.Insurers make money in two ways:

• Through underwriting, the process by which insurers select the risks to insure and decide how much in premiums to charge for accepting those risks

• By investing the premiums they collect from insured parties The most complicated aspect of the insurance business is the actuarial science of ratemaking (price-setting) of policies, which uses statistics and probability to approximate the rate of future claims based on a given risk. After producing rates, the insurer will use discretion to reject or accept risks through the underwriting process.At the most basic level, initial ratemaking involves looking at the frequency and severity of insured perils and the expected average payout resulting from these perils. Thereafter an insurance company will collect historical loss data, bring the loss data to present value, and compare these prior losses to the premium collected in order to assess rate adequacy.[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. The Association of British Insurers (gathering 400 insurance companies and 94% of UK insurance services) has almost 20% of the investments in the London Stock Exchange.[25]

In the United States, the underwriting loss of property and casualty insurance companies was $142.3 billion in the five years ending 2003. But overall profit for the same period was $68.4 billion, as the result of float. Some insurance industry insiders, most notably 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 depressed period. Bear markets do cause insurers to shift away from investments and to toughen up their underwriting standards, so a poor economy generally means high insurance premiums. This tendency to swing between profitable and unprofitable periods over time is commonly known as the underwriting, or insurance, cycle.[26]

Claims[edit]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[edit]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.[27]

Types of insurance[edit]

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 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.[28]

Auto insurance[edit]Main article: Vehicle insurance

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A wrecked vehicle in CopenhagenAuto 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[edit]Main article: Gap insuranceGap 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 companies 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 your finance company when you first purchase your vehicle. Most auto insurance companies offer this coverage to consumers as well. If you are unsure if GAP coverage had been purchased, you should check your vehicle lease or purchase documentation.Health insurance[edit]Main articles: Health insurance and Dental insurance

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Great Western Hospital, SwindonHealth 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.Accident, sickness, and unemployment insurance[edit]

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Workers' compensation, or employers' liability insurance, is compulsory in some countries

• Disability insurance policies provide financial support in the event of the policyholder becoming unable to work because of disabling illness or injury. It provides monthly support to help pay such obligations as mortgage loans and credit cards. Short-term and long-term disability policies are available to individuals, but considering the expense, long-term policies are generally obtained only by those with at least six-figure incomes, such as doctors, lawyers, etc. Short-term disability insurance covers a person for a period typically up to six months, paying a stipend each month to cover medical bills and other necessities.

• Long-term disability insurance covers an individual's expenses for the long term, up until such time as they are considered permanently disabled and thereafter. 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 wages lost and accompanying medical expenses incurred because of a job-related injury.

Casualty[edit]Main article: Casualty insuranceCasualty 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.

• 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 political conditions could result in a loss.

Life[edit]Main article: Life insurance

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Amicable Society for a Perpetual Assurance Office, Serjeants' Inn, Fleet Street, London, 1801

Life insurance provides a monetary benefit to a decedent's family or other designated beneficiary, and may specifically provide for income to an insured person's family, burial, funeral and other final expenses. Life insurance policies often allow the option of having the proceeds paid to the beneficiary either in a lump sum cash payment or an annuity. In most states, a person cannot purchase a policy on another person without their knowledge.Annuities provide a stream of payments and are generally classified as insurance because they are issued by insurance companies, are regulated as insurance, and require the same kinds of actuarial and investment management expertise that life insurance requires. Annuities and pensions that pay a benefit for life are sometimes regarded as insurance against the possibility that a retiree will outlive his or her financial resources. In that sense, they are the complement of life insurance and, from an underwriting perspective, are the mirror image of life insurance.Certain life insurance contracts accumulate cash values, which may be taken by the insured if the policy is surrendered or which may be borrowed against. Some policies, such as annuities and endowment policies, are financial instruments to accumulate or liquidate wealth when it is needed.In many countries, such as the 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[edit]Burial insurance is a very old type of life insurance which is paid out upon death to cover final expenses, such as the cost of a funeral. The Greeks and Romans introduced burial insurance c. 600 CE when they organized guilds called "benevolent societies" which cared for

the surviving families and paid funeral expenses of members upon death. Guilds in the Middle Ages served a similar purpose, as did friendly societies during Victorian times.Property[edit]Main article: Property insurance

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This tornado damage to an Illinois home would be considered an "Act of God" for insurance purposes

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:

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US Airways Flight 1549 was written off after ditching into the Hudson River• Aviation insurance protects aircraft hulls and spares, and

associated liability risks, such as passenger and third-party liability. Airports may also appear under this subcategory, including air traffic control and refuelling operations for international airports through to smaller domestic exposures.

• Boiler insurance (also known as boiler and machinery insurance, or equipment breakdown insurance) insures against accidental physical damage to boilers, equipment or machinery.

• Builder's risk insurance insures against the risk of physical loss or damage to property during construction. Builder's risk insurance is typically written on an "all risk" basis covering damage arising from any cause (including the negligence of the insured) not otherwise expressly excluded. Builder's risk insurance is coverage that protects a person's or organization's insurable interest in materials, fixtures 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.[29]

• 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.[30]

• 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.

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Hurricane Katrina caused over $80 billion of storm and flood damage• Flood insurance protects against property loss due to flooding.

Many U.S. insurers do not provide flood insurance in some parts of the country. In response to this, the federal government created the National Flood Insurance Program which serves as the insurer of last resort.

• Home insurance, also commonly called hazard insurance or homeowners insurance (often abbreviated in the real estate industry as HOI), provides coverage for damage or destruction of the policyholder's home. In some geographical areas, the policy may exclude certain types of risks, such as flood or earthquake, that require additional coverage. Maintenance-related issues are typically the homeowner's responsibility. The policy may include inventory, or this can be bought as a separate policy, especially for people who rent housing. In some countries, insurers offer a package which may include liability and legal responsibility for injuries and property damage caused by members of the household, including pets.[31]

• 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 principal.

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The demand for terrorism insurance surged after 9/11• 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).

• 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 as hurricanes.

Liability[edit]Main article: Liability insuranceLiability 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.

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The subprime mortgage crisis was the source of many liability insurance losses• Public 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 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 malpractice insurance.

Credit[edit]Main article: Payment protection insuranceCredit insurance repays some or all of a loan when certain circumstances arise to the borrower such as unemployment, disability, or death.

• 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.

Other types[edit]• 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.[32] In car insurance, all-risk policy includes also the damages caused by the own driver.

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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 insurance covers the loss of income, and the expenses incurred, after a covered peril interrupts normal business operations.

• Collateral protection insurance (CPI) insures property (primarily vehicles) held as collateral for loans made by lending institutions.

• 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.

• 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.

• 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 and 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 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.

• 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[edit]• Fraternal insurance is provided on a cooperative basis by

fraternal benefit societies or other social organizations.[33]

• 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 the welfare state. This is a large, complicated topic that engenders tremendous debate, which can be further studied in the following articles (and others):

• National Insurance • Social safety net • Social security • Social Security debate (United States) • Social Security (United States) • Social welfare provision

• 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 self-insurance[edit]

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 some Muslim groups, depend on support provided by their 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 and may have disappeared altogether.Insurance companies[edit]

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Certificate issued by Republic Fire Insurance Co. of New York c. 1860Insurance companies may be classified into two groups:

• Life insurance companies, which sell life insurance, annuities and pensions products.

• Non-life or property/casualty insurance companies, which sell other types of insurance.

General insurance companies can be further divided into these sub categories.

• Standard lines • Excess lines

In most countries, life and non-life insurers are subject to different regulatory regimes and different tax and accounting rules. The main reason for the distinction between the two types of company is that life, annuity, and pension business is very long-term in nature – coverage for life assurance or a pension can cover risks over many decades. By contrast, non-life insurance cover usually covers a shorter period, such as one year.In the United States, standard line insurance companies are insurers that have received a license or authorization from a state for the purpose of writing specific kinds of insurance in that state, such as automobile insurance or homeowners' insurance.[34] They are typically referred to as "admitted" insurers. Generally, such an insurance company must submit its rates and policy forms to the state's insurance regulator to receive his or her prior approval, although whether an insurance company must receive prior approval depends upon the kind of insurance being written. Standard line insurance companies usually charge lower premiums than excess line insurers and may sell directly to individual insureds. They are regulated by state laws, which include restrictions on rates and forms, and which aim to protect consumers and the public from unfair or abusive practices.[34] These insurers also are required to contribute to state guarantee funds, which are used to pay for losses if an insurer becomes insolvent.[34]

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The subscription room at Lloyd's of London in the early 19th century.Excess line insurance companies (also known as Excess and Surplus) typically insure risks not covered by the standard lines insurance market, due to a variety of reasons (e.g., new entity or an entity that does not have an adequate loss history, an entity with unique risk characteristics, or an entity that has a loss history that does not fit the underwriting requirements of the standard lines insurance market).[34] They are typically referred to as non-admitted or unlicensed insurers.[34] Non-admitted insurers are generally not licensed or authorized in the states in which they write business, although they must be licensed or authorized in the state in which they are domiciled.[34] These companies have more flexibility and can react faster than standard line insurance companies because they are not required to file rates and forms.[34] However, they still have substantial regulatory requirements placed upon them.Most states require that excess line insurers submit financial information, articles of incorporation, a list of officers, and other general information.[34] They also may not write insurance that is typically available in the admitted market, do not participate in state guarantee funds (and therefore policyholders do not have any recourse through these funds if an insurer becomes insolvent and cannot pay claims), may pay higher taxes, only may write coverage for a risk if it has been rejected by three different admitted insurers, and only when the insurance producer placing the business has a surplus lines license.[34] Generally, when an excess line insurer writes a policy, it must, pursuant to state laws, provide disclosure to the

policyholder that the policyholder's policy is being written by an excess line insurer.[34]

On July 21, 2010, President Barack Obama signed into law the Nonadmitted and Reinsurance Reform Act of 2010 ("NRRA"), which took effect on July 21, 2011, and was part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The NRRA changed the regulatory paradigm for excess line insurance. Generally, under the NRRA, only the insured's home state may regulate and tax the excess line transaction.[35]

Insurance companies are generally classified as either mutual or proprietary companies.[36] 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.Other possible forms for an insurance company include reciprocals, in which policyholders reciprocate in sharing risks, and Lloyd's organizations.Insurance companies are rated by various agencies such as A. M. 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.Reinsurance companies are insurance companies that sell policies to other insurance companies, allowing them to reduce their risks and protect themselves from very large losses. The reinsurance market is dominated by a few very large companies, with huge reserves. A reinsurer may also be a direct writer of insurance risks as well.Captive insurance companies may be defined as limited-purpose insurance companies established with the specific objective of financing risks emanating from their parent group or groups. This definition can sometimes be extended to include some of the risks of the parent company's customers. In short, it is an in-house self-insurance vehicle. Captives may take the form of a "pure" entity (which is a 100% subsidiary of the self-insured parent company); of a

"mutual" captive (which insures the collective risks of members of an industry); and of an "association" captive (which self-insures individual risks of the members of a professional, commercial or industrial association). Captives represent commercial, economic and tax advantages to their sponsors because of the reductions in costs they help create and for the ease of insurance risk management and the flexibility for cash flows they generate. Additionally, they may provide coverage of risks which is neither available nor offered in the traditional insurance market at reasonable prices.The types of risk that a captive can underwrite for their parents include property damage, public and product liability, professional indemnity, employee benefits, employers' liability, motor and medical aid expenses. The captive's exposure to such risks may be limited by the use of reinsurance.Captives are becoming an increasingly important component of the risk management and risk financing strategy of their parent. This can be understood against the following background:

• Heavy and increasing premium costs in almost every line of coverage

• Difficulties in insuring certain types of fortuitous risk • Differential coverage standards in various parts of the world • Rating structures which reflect market trends rather than

individual loss experience• Insufficient credit for deductibles and/or loss control efforts

There are also companies known as "insurance consultants". Like a mortgage broker, these companies are paid a fee by the customer to shop around for the best insurance policy amongst many companies. Similar to an insurance consultant, an 'insurance broker' also shops around for the best insurance policy amongst many companies. However, with insurance brokers, the fee is usually paid in the form of commission from the insurer that is selected rather than directly from the client.Neither insurance consultants nor insurance brokers are insurance companies and no risks are transferred to them in insurance transactions. Third party administrators are companies that perform underwriting and sometimes claims handling services for insurance companies. These companies often have special expertise that the insurance companies do not have.

The financial stability and strength of an insurance company should be a major consideration when buying an insurance contract. An insurance premium paid currently provides coverage for losses that might arise many years in the future. For that reason, the viability of the insurance carrier is very important. In recent years, a number of insurance companies have become insolvent, leaving their policyholders with no coverage (or coverage only from a government-backed insurance pool or other arrangement with less attractive payouts for losses). A number of independent rating agencies provide information and rate the financial viability of insurance companies.Across the world[edit]

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Life insurance premiums written in 2005

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Non-life insurance premiums written in 2005Global insurance premiums grew by 2.7% in inflation-adjusted terms in 2010 to $4.3 trillion, climbing above pre-crisis levels. The return to growth and record premiums generated during the year followed two years of decline in real terms. Life insurance premiums increased by 3.2% in 2010 and non-life premiums by 2.1%. While industrialised countries saw an increase in premiums of around 1.4%, insurance markets in emerging economies saw rapid expansion with 11% growth in premium income. The global insurance industry was sufficiently capitalised to withstand the financial crisis of 2008 and 2009 and most insurance companies restored their capital to pre-crisis levels by the end of 2010. With the continuation of the gradual

recovery of the global economy, it is likely the insurance industry will continue to see growth in premium income both in industrialised countries and emerging markets in 2011.Advanced economies account for the bulk of global insurance. With premium income of $1.62 trillion, Europe was the most important region in 2010, followed by North America $1.409 trillion and Asia $1.161 trillion. Europe has however seen a decline in premium income during the year in contrast to the growth seen in North America and Asia. The top four countries generated more than a half of premiums. The United States and Japan alone accounted for 40% of world insurance, much higher than their 7% share of the global population. Emerging economies accounted for over 85% of the world's population but only around 15% of premiums. Their markets are however growing at a quicker pace.[37] The country expected to have the biggest impact on the insurance share distribution across the world is China. According to Sam Radwan of ENHANCE International LLC, low premium penetration (insurance premium as a % of GDP), an ageing population and the largest car market in terms of new sales, premium growth has averaged 15–20% in the past five years, and China is expected to be the largest insurance market in the next decade or two.[38]

Regulatory differences[edit]Main article: Insurance lawIn the United States, insurance is regulated by the states under the McCarran-Ferguson Act, with "periodic proposals for federal intervention", and a nonprofit coalition of state insurance agencies called the National Association of Insurance Commissioners works to harmonize the country's different laws and regulations.[39] The National Conference of Insurance Legislators (NCOIL) also works to harmonize the different state laws.[40]

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.[41] As far as insurance in the United Kingdom, the Financial Services Authority took over insurance regulation from the General Insurance Standards Council

in 2005;[42] laws passed include the Insurance Companies Act 1973 and another in 1982,[43] and reforms to warranty and other aspects under discussion as of 2012.[44]

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[45] 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.[46]

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.Controversies[edit] Insurance insulates too much[edit]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. To reduce their own financial exposure, insurance companies have contractual clauses that mitigate their obligation to provide coverage if the insured engages in behavior that grossly magnifies their risk of loss or liability.[citation needed]

For example, life insurance companies may require higher premiums or deny coverage altogether to people who work in hazardous occupations or engage in dangerous sports. Liability insurance providers do not provide coverage for liability arising from intentional torts committed by or at the direction of the insured. Even if a provider desired to provide such coverage, it is against the public policy of most countries to allow such insurance to exist, and thus it is usually illegal.[citation needed]

Complexity of insurance policy contracts[edit]

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9/11 was a major insurance loss, but there were disputes over the World Trade Center's insurance policyInsurance 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 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 towards encouraging an insured to purchase more insurance than might be necessary at a higher price. A broker generally holds

contracts with many insurers, thereby allowing the broker to "shop" the market for the best rates and coverage possible.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 sales 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 and/or agents. However, such a consultant must still work through brokers and/or agents in order to secure coverage for their clients.Limited consumer benefits[edit]In United States, economists and consumer advocates generally consider insurance to be worthwhile for low-probability, catastrophic losses, but not for high-probability, small losses. Because of this, consumers are advised to select high deductibles and to not insure losses which would not cause a disruption in their life. However, consumers have shown a tendency to prefer low deductibles and to prefer to insure relatively high-probability, small losses over low-probability, perhaps due to not understanding or ignoring the low-probability risk. This is associated with reduced purchasing of insurance against low-probability losses, and may result in increased inefficiencies from moral hazard.[47]

Redlining[edit]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.[48]

In July 2007, The 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.[49] The report was disputed by representatives of the Consumer Federation of America, the National Fair Housing Alliance, the National Consumer Law Center, and the Center for Economic Justice, for relying on data provided by the insurance industry.[50]

All states have provisions in their rate regulation laws or in their fair trade practice acts that prohibit unfair discrimination, often called redlining, in setting rates and making insurance available.[51]

In determining premiums and premium rate structures, insurers consider quantifiable factors, including location, credit scores, gender, occupation, marital status, and education level. However, the use of such factors is often considered to be unfair or unlawfully discriminatory, and the reaction against this practice has in some instances led to political disputes about the ways in which insurers determine premiums and regulatory intervention to limit the factors used.An insurance underwriter's job is to evaluate a given risk as to the likelihood that a loss will occur. Any factor that causes a greater likelihood of loss should theoretically be charged a higher rate. This basic principle of insurance must be followed if insurance companies are to remain solvent.[citation needed] Thus, "discrimination" against (i.e., negative differential treatment of) potential insureds in the risk evaluation and premium-setting process is a necessary by-product of the fundamentals of insurance underwriting. For instance, insurers charge older people significantly higher premiums than they charge younger people for term life insurance. Older people are thus treated

differently from younger people (i.e., a distinction is made, discrimination occurs). The rationale for the differential treatment goes to the heart of the risk a life insurer takes: Old people are likely to die sooner than young people, so the risk of loss (the insured's death) is greater in any given period of time and therefore the risk premium must be higher to cover the greater risk. However, treating insureds differently when there is no actuarially sound reason for doing so is unlawful discrimination.Insurance patents[edit]Further information: Insurance patentNew 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 auto insurance. Early versions were independently invented and patented by a major US auto insurance company, Progressive Auto Insurance (U.S. Patent 5,797,134) and a Spanish independent inventor, Salvador Minguijon Perez (EP 0700009).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.[52]

Inventors can now have their insurance US patent applications reviewed by the public in the Peer to Patent program.[53] The first insurance patent application to be posted was US2009005522 "risk assessment company". It was posted on March 6, 2009. This patent application describes a method for increasing the ease of changing insurance companies.[54]

The insurance industry and rent-seeking[edit]Certain insurance products and practices have been described as rent-seeking by critics.[citation needed] That is, some insurance products or practices are useful primarily because of legal benefits, such as reducing taxes, as opposed to providing protection against risks of adverse events. Under United States tax law, for example, most owners of variable annuities and variable life insurance can invest their premium payments in the stock market and defer or eliminate paying any taxes on their investments until withdrawals are made. Sometimes this tax deferral is the only reason people use these products.[citation needed] Another example is the legal infrastructure which allows life insurance to be held in an irrevocable trust which is used to pay an estate tax while the proceeds themselves are immune from the estate tax.Religious concerns[edit]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[55] (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.[56]

Jewish rabbinical scholars also have expressed reservations regarding insurance as an avoidance of God's will but most find it acceptable in moderation.[57]

Some Christians believe insurance represents a lack of faith[citation needed] 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.[58][59][60]