| Much ado about insurance |
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Qualitatively, it can be imagined of as an intentional small loss incurred in order to prevent a probable large loss. A company selling insurances is known as an insurer. The person buying or opting for the insurance policy is known as the insured or the policyholder. The amount charged for an insurance coverage is known as the premium. This is determined by a factor known as the insurance rate. With time and demand, risk management has become a distinct field of study. We here state a few characteristics of commercially insurable risks. Most of the insurance policies are provided for individuals of large classes. For e.g. automobile insurance is a huge industry in the United States of America. It had almost 175 million insurances in year 2004. The fact that a large number of homogenous exposure units exist, automatically implies that insurers benefit from the law of large numbers. In the context of insurance, law of large numbers sates that as the number of exposure unit increases, the actual results are also increasingly likely to get close to the expected proportions. However, there are a few exceptions to this criterion as well. Some organizations are very specific in their business. For e.g. Lloyd’s of London is famous for granting insurances to celebrities. On the other hand, satellite launch insurance covers events that are rare. Big commercial property policies are at times likely to insure exceptional properties for which no homogenous exposure units exist. Even if a property fails on this criterion, it is usually insurable. There is another type of loss termed as a definite loss. The event which creates this loss takes place at a known time and place and from a known cause. The best example to illustrate this would be the death of an insured person on a life insurance policy. Accidents, injuries, etc are instances that meet this criterion. Other type of losses which are definite only n theory may exist as well. For e.g. occupational disease may involve prolonged exposure to harmful conditions where no specific time, place or cause is detectable. Another type of loss is the accidental loss. The event in this case should be one that is outside the control of the insured or the beneficiary. Business risks are not insurable in this case. There are also large losses. In such cases, the size of the loss should be meaningful from the point of view of the insured. The insurance premiums need to cover the expected losses plus a lot of other costs as well. These include cost of issuing and administering policy, adjusting losses and also supplying the capital required to assure that the insurer will be able to pay the claim. For small losses, the latter costs may amount up to several times the size of the expected cost losses. So there is actually no point in paying these costs until the protection offered has some real value. The premium also has to be affordable. If the probability of occurrence of an event is very high, or its cost is very large and hence the premium is very large relative to the amount of protection offered, then nobody will buy such an insurance policy. Also as per financial accounting standards, the premium cannot be large enough to cause a significant loss to the insurer. Another term one needs to be acquainted with in the context of insurance is that of calculable loss. For calculable loss there must be at least two measurable elements. These are the probability of loss and the attendant of loss. The former is generally an empirical exercise while the latter is more to do with the ability of a reasonable person in charge of a copy of the policy and a proof of loss associated with a claim under the concerned policy. Another important term that one should know is limited risk of catastrophically large losses. In this case the essential risk is more than often, aggregation. If one particular event can cause losses to many policy holders of the same insurer, the capacity of the insurer to issue policies becomes constrained. This is not due to the factors surrounding the characteristics of an individual policy holder but is due to the factors surrounding the sum of all policy holders so exposed. Usually insurers limit their exposure to loss from a single event to a small fraction of their capital base. This is usually of the order of 5 percent. The capital constraint restricts an insurer from issuing policies to a lot of people when the loss can be aggregated or the individual policy could produce unimaginably large claims. An example to illustrate this phenomenon would be that of an earthquake. In earthquake insurance, the ability or capacity of an underwriter to issue a new policy depends on how many policies it has already issued in the past. Wind insurance in cyclone prone regions is also an example of this kind of constraint. In extreme cases the aggregation might have an impact on the entire industry. This is so because the combined capital of insurers and reinsurers can be small as compared to the needs of potential policy holders residing in high risk areas. In fire insurance it is possible to point out single properties whose total exposed value is higher than any individual insurer’s capital constraint. Usually these kinds of properties are shared by several insurers or are insured by an individual who syndicates the risk into the reinsurance market. Another definition which we need to know is that of indemnity. Indemnity in general means to make whole again. An insurance contract can be one of the following two types.
The difference is notable on pen and paper but practically it is not too prominent. An indemnity policy will not pay its claims until and unless the insured person has paid to a third party. We shall put forward an incident as an example. Imagine that a guest visits your home. He slips on the floor due to the wet tissues that you had left there. He sues you for this and wins ten thousand dollars. Under an indemnity policy, the home owner would have to pay for the visitor’s fall. He would then be indemnified by the insurance company. However, under the same situation, a pay on behalf policy would act slightly differently. Under a pay on behalf carrier the insurance carrier would pay the claim and the insured would not be out of pocket in any case. Most of the modern day insurances are in effect pay on behalf insurances. Anybody seeking to transfer risk becomes insured once the insurance company issues a contract called the insurance policy. A normal insurance contract includes the partier, the premium, the coverage time, the loss event, the coverage amount and all exclusions. When an insured experiences a loss for a specified cause, the insurance entitles him or her to claim against the insurer for the covered amount as mentioned in the policy. The amount of money paid by the insurer for assuming the risk is termed as premium. A few more terms that we should know of in the context of insurance are business model, underwriting and investing. There is a very simple equation representing the insurer’s business model. The equation states that profit earned = earned premium + investment income – incurred loss – underwriting expenses. Insurers gain money in two ways. Firstly We also need to understand what claims mean and what are the technicalities associated with claims. Claim is the actual product paid to the insured on completion of terms and conditions of the insurance policy. It is the materialized utility of insurance. However, one always keeps hoping that it shall never be used. Claims can be filtered directly by the claimer or through brokers and agents. Claims are usually filed on forms produced by ACORD. Claim departments of an insurance company usually employ a large number of claim adjusters, data entry clerks and records management staff. The incoming claims are categorized by its severity. These are then assigned to the claim adjusters whose settlement authority obviously varies with knowledge and work experience. It is the duty of the adjuster to make a thorough investigation of each claim. For this the cooperation of the insured is extremely vital. The process is carried out in order to determine the reasonable monetary value and thereby authorizes the deserved payment. The adjustment of liability insurance claims is particularly tough as a third party is always involved in such cases. Also this third party is under no contract to cooperate with the insurer. Thus usually this third party has the tendency to regard the insurer as a deep pocket. The adjuster also is bound to obtain legal advice for the insured. He also has to monitor the entire legal proceedings which may take years to terminate. The adjuster also has to be present whenever he is summoned by the judge. The process of managing claim handling function obliges insurers to balance the elements of customer satisfaction, administrative expenses and overpayment leakages. Fraudulent practices are a huge business risk that must be overcome in order to accomplish this balancing act.
The colonist Robert hayman also mentions this in his writings. He says that two insurance policies had been taken out with the diocesan chancellor of London named Arthur duck. These were worth 100 pounds. These related to the safe arrival of hayman’s ship in Guyana and the other with his life. This will or testimony was signed on 16th November 1628. As London’s importance for trade grew with time, marine insurance in London also received a boost. In the late years of the 1600s, a coffe house set up by Edward Lloyd became a hub for ship owners, merchants and captains. Gradually it became a thriving centre for those willing to have their ships insured. It became an informal party cum insurance venue. Till date, lloyd’s market remains a landmark in London in terms of marine insurances. However, it does not quite provide any other type of insurance. Modern day insurance can be traced back to the great fire of London in 1666. A total of 13200 houses were engulfed in this huge fire. Soon after this incident, Nicholas barbon set up an office to insure buildings. He also happens to have established England’s first fire insurance company. It majorly insured brick and frame homes. The first fire insurance or rather insurance company of usa was in Charleston in south Carolina. Benjamin Franklin was one of the key people in popularizing insurance. He also founded a community that helped make people aware of the importance of insurance. His company was the first to make contributions towards fire insurance. It propagated knowledge about fire safety and how to build fire safe homes. It also warned people against possible fire hazards. This was a great step in the field of insurance awareness. In context of insurances it is necessary to know the different types of insurances. There are many types. We shall tell you the basic few. Nowadays, footballers can even insure their legs! Any risk that can be technically quantified has the potential to be insured. Specific kinds of risks are generally termed as perils. Insurance policies always mention the covered perils in detail. There are may different types of insurances. Auto insurance is a type of insurance that covers both property as well as liability risks. A homeowner’s policy includes coverage of damage caused to home and property and all other belongings. Even if guests are injured in the owner’s house, the claim is demandable. Then there is another type of insurance known as business insurance. This kind of insurance protects business against risks. Business insurance can further be classified into types such as professional liability insurance, professional indemnity insurance, business owner’s policy, etc. these all types serve different purposes and cater to various sections of the society. We shall now tell you about vehicle insurance. Auto insurance protects you against any kind of monetary loss in case of an accident. This is clearly mentioned in a contract between you and the company. You will have to pay the premium timely and your needs will be taken care of by the company.
Another type of insurance policy scheme exists and it is known as total permanent disability insurance. This kind of a scheme will provide benefits only when the insured is permanently disabled and can no longer work in his profession. More than often, this is part of a life insurance package. There is also something called a worker’s compensation. This scheme replaces a worker’s wages or his medical expenses in case of any accident or injury where he is unable to work and has to undergo costly treatment. Another class of insurance exists and that is known as casualty insurance. This insurance usually protects the insured from accidental losses and is not necessarily related to any property insurance. There are many topics which come under casualty insurance. We shall discuss a few in detail. Crime insurance comes under casualty insurance. This form of insurance gives coverage to the insured against losses that he may face due to criminal activities. Big companies or threatened houses, museums, etc can obtain theft insurance in order to protect themselves against theft insurance. This is an example of implementing criminal insurance. Another type of casualty insurance is known as political risk insurance. These can be obtained by companies under a potential condition where a change in the political scenario, a revolution or a war can possibly cause a lot of losses. This type of insurance is usually sought by business operations. Now we come to a very important topic known as life insurance. Life insurance protects the heirs of the insured from monetary losses in the event of his or her death. The heir is not always a blood relation. It can be anybody designated by the policy holder. This kind of insurance usually covers funeral and other final expenses. Life insurance policy holders often pay the premium together as a lump sum amount. However, it may also be paid in installments as is done in case of other insurances. Another term that we need to know is annuity. Annuity refers to a stream of payments. They are generally classified as insurance as they are issued by insurance issuers and also follow the same rules as insurance. These need similar type of actuarial and investment management expertise that life insurance needs. Annuities are analogous to pensions and are paid as a benefit for life. They have a possibility that a retired person will outlive or finish all his monetary resources. So in that context they are complimentary to life insurances and are more like pensions. However, from an underwriting perspective they are the mirror image twins of life insurance policies. Some life insurance policies sum up cash values. These can be claimed by the insured if and when the respective insurance policies are surrendered. These may also be borrowed against. Policies like annuities and endowment policies are merely resources to gather liquid cash in time of need. In the United States of America, the laws governing taxation state that the interest on this mentioned cash value is not taxable under certain given conditions. This automatically professes life insurance policies as a good means of saving money as well as protection to untimely demise. In the United States of America, the tax obtained on interest of insurances, annuities and other policies is generally deferred. This refers to only life insurance policies though. But in some cases, the profit obtained from tax deferral may be curbed by a low return value. This again is highly dependent on the insuring company. It also simultaneously depends on other factors like the type of policy, mortality, market return, etc. there are also other tax saving options which may turn out to be better alternatives for value accumulation. Another very important topic of concern is property insurance. It provides compensations for losses incurred due to fire, theft, weather damage, calamity, etc. these are more than often also covered in terms of specific insurances such as fire insurance, flood insurance, earthquake insurance, home insurance, inland marine insurance, boiler insurance, etc. there is also another type of insurance known as automobile insurance. This is a very common form of insurance and covers claims and legal liabilities. In the United States of America, an automobile insurance policy is mandatory to operate a vehicle on the streets. Credit card companies also are known to insure against the damage on rented cars. Driving school insurances also cover any driver undergoing training. This is however not always true in the case of motorcycles. Other forms of insurance include aviation insurance. This type of insurance insures the policy holder against spares, hull, deductibles, hull wear and liability risks. Boiler insurance as also mentioned earlier insures the individual against damage caused to machinery or other equipments. On the other hand, builder’s risk insurance compensates for damages to property during construction. These policies can be claimed under any reason whatsoever. Obviously this makes the policies pretty rare. We also have something known as crop insurance. This type of policy usually reduces the many risks associated with growing crops. The risks included are crop damage by weather, hail, sleet, drought, frost, insects, pests, diseases, etc. earthquake insurance is also an important term one should be acquainted with. It compensates for losses incurred due to an earthquake. Earthquake policies are pretty expensive. It is also not a very common form of insurance. Most earthquake insurances are obtainable in earthquake prone zones. They usually feature a very high deductible. Policy rates depend on many factors such as construction homes, area, zone, etc. there is also something called a fidelity bond. It is a form of casualty insurance that covers insured people for losses incurred due to fraudulent activities of some specified individual. Many businesses are insured against losses incurred due to dishonest acts of hired employees. Flood insurances provide protection against damage due to floods. In the United States of America, many insurers are very reluctant to provide insurance against flood damage. That is why the government has come up with a relief programmed called national flood insurance program. This is kind of an insurer of the last resort. There are various forms of home insurances available as well. Under this comes the landlord insurance. It is specially catering to those who own properties and also rent them out. In the United Kingdom, a landlord has to obtain the landlord’s insurance if he is renting his property out. In such a case he cannot claim a normal home insurance. Then there is marine insurance. These cover the losses of ships, marine cargo, inland waterways, etc. if the owner of the cargo and the carrier are different people, then usually the owner of the cargo is covered for losses. Losses like shipwreck, fire, etc are usually compensated for by the marine insurance. There is another important term known as a surety bond. It is a three party insurance that promises the performance of the principal. You may also opt for terrorism insurance. As the name suggests, terrorism insurance compensates against losses caused by terrorist activities. Similarly you may have volcano insurance in volcanic regions. On a similar note, there may be windstorm insurance, typhoons, cyclones, etc. in context of insurances; we need to understand the term liability very well. Liability insurance is an extremely broad topic that covers most legal claims against an insured party. Most normal insurances do exhibit some part of liability coverage. This is most common in case of a home owner’s policy. This policy will also protect and compensate for damage if somebody faces any mishap at the insured party’s property. For e.g. if a guest slips and falls at your home, then it is legal for him to claim liability insurance. This is usually incorporated in all home loans. Similarly, automobile insurances will also contain liability clauses against losses caused to a victim due to an accident with your vehicle. The victim’s damages have to be cleared through this liability insurance. The protection or the service offered by liability insurance has two facets. Liability policies usually cover events that occur due to the negligence of the insured. They will not cover the intentional acts of the policy holder. Thus it has to be found out through detailed investigation as to whether the act was intentional or not. Public liability insurances are also important as they cover business against claims if their operations injure their employee or damage any property. There is also something known as directors and officer’s liability insurance. This form of a bond protects an organization from legal costs due to mistakes of directors and officers for which they are liable. In the corporate world it is referred to as “d and o”. Then there is also environmental liability insurance. These protect one against most damages caused by environmental pollution and pollutants. Other important terms include prize indemnity insurance. This protects the insured from giving away a big sum of money at any specific event. These include prize offers, tournaments, contests, etc. then there is professional liability insurance. This is sometimes also known as professional indemnity insurance. It protects professionals against potential negligence claims made by their customers. For e.g. a patient may file a claim of negligence against a doctor or a customer may file negligence claims against architectures. The professional liability insurance has different names in different profession. But in effect they do the same work. In context of the medical profession, professional liability insurance is known as malpractice insurance. Notaries usually take out omissions and errors insurance. Other professional liability insurance policy holders maybe real estate brokers, policy agents, inspectors, appraisers and web developers. To know in detail about insurance, you also need to know quite a bit about the term credit. Credit insurances are usually used to repay the loan when the borrower is unemployed, disabled or dead. Mortgage insurances insure the lender against default by the borrower. Mortgage insurance is a form of credit insurance. However, the term credit insurance is usually used to refer to policies that cover some kind of debt. A few credit card companies also offer credit insurances in the form of payment protection plans. Collateral protection insurance (cpl) insures properties held as collateral in context of loans made by policies known as lending solutions. Coverage for civilian workers employed by the government is provided by the defense base act worker’s compensation. These workers are hired to perform contracts outside the United States of America and Canada. Defense base act is required for all American citizen, American residents, green card holders and all other employees and sub contractors hired as per overseas government contract. Some countries like the United States of America have made it mandatory for specified citizens to obtain the dba. This coverage includes all expenses related to medical treatment and loss of income as well as accidental and death benefits. Another kind of insurance is also known as expatriate insurance. This provides protection to individuals working outside their motherland. The protection is offered for automobiles, property, health, liability and business matters. The financial loss insurance is also known as business interruption insurance. This protects companies and business tycoons against financial risk. We can take an example over here. Suppose business purchases coverage to protect itself from loss incurred due to a factory fire. This coverage will pay all the expenses for the losses that the A well designed protected self insurance program brings down the cost of insurance and provides efficient risk management information. Retrospectively rated insurance is also an effective method of establishing premium on huge commercial accounts. The final premium in this case is based on how much loss the policy holder has faced during the policy term. Sometimes this is also further subjected to a minimum and maximum premium. The final premium is found out through a formula. Under this scheme, the premium for the current year is based on the losses incurred in the current year. The premium adjustments sometimes take a long time to be settled. The formula goes like this: retrospective premium = converted loss + basic premium x tax multiplier. A number of variations of this same formula has been developed and is being used extensively. Formal self insurance is also another very important concept. It is an intentional decision to pay otherwise insurable losses out of one’s own pocket. This is formally done by setting up a separate fund where money is deposited on a periodic basis. Self insurance schemes are targeted at high frequency, low severity losses. If these losses are compensated by conventional insurance then the premium will include loadings for the company’s general expenses, premium taxes and contingencies. Small, frequent losses may cause the transaction to exceed the benefit of volatility reduction. There is another type of insurance known as reinsurance. It is purchased by insurance companies to protect themselves against unexpected losses. Financial reinsurance is mainly used to manage capital and not to transfer insurance risk. The term social insurance means different things in different countries. It is essentially a collection of insurance coverage’s including many parts of a normal life insurance like disability income, unemployment insurance, health insurance, and retirement savings. It requires participation by all citizens of a nation. If all people in a society are forced to pay premiums, then they can lay their claims as and when they want to. It also becomes related to deeper concepts of society and welfare state. This can be subdivided for researchers and students as national insurance, social safety net, social security, social security database, social security of USA, social security debate and social welfare provision. Protection against catastrophic or unpredictable losses is provided by stop loss insurance. It is usually purchased by organizers who do not wish to take 100 % liability for losses that amount from plans. Under a stop loss policy, the insurance company becomes liable for those losses that exceed deductibles. We also need to know a little about closed community self insurance. Virtual insurances are created by some groups. This is an alternative for the usual pen and paper contracts. Some religious groups in particular like the Amish and a few Muslims depend on the help lent by their community in times of need. This is a useful and innovative way of risk transference. The risk presented by any one person is assumed by all other community members. This means more helping hands but fewer loads. This also encourages trust among community members. This also sometimes helps even out differences between community members. Some also point out moral hazards of insurance contracts in pen and paper. Let us now get tp know about insurance companies. Insurance companies maybe categorized in two ways. Life insurance and non life insurance. Life insurance companies sell life insurance, annuities and pension products. Non life insurances are general, property, casualty insurances which sell other types of insurances. General insurances are further divided as standard lines and excess lines. In some countries, life and non life insurers are subject to different regulatory rules. The primary reason for this difference between the two companies is that life, annuity and pension business is extremely long term in nature. Life insurance or pension coverage can cover risks over many years. However, non life insurance usually covers a short period of time. In the United States of America, standard line insurers are the mainstream insurers. They insure autos, homes and businesses. They use cookie cutter policies and there is no variation from one person to another. They sell directly to the person concerned. There is no middle man. They are also under vigilance by state law and hence cannot charge more than necessary as contrast to other companies. Excess line companies on the other hand cover risks that are not taken care of by the standard line companies. They are thus placed with non admitted insurers. Non admitted insurers are not registered in the location where the risk is located. These organizations are normally more flexible. This is because they do not have to fill in rates and forms as the admitted ones are obliged to do. But they do have loads of regulations and rules piled upon them. There are many state laws governing their operations. State laws usually want that insurance placed with excess line agents and brokers should not be available through standard licensed insuring companies. There are two types of insurance companies. These are the mutual companies and the stock companies. Policy holders are usually the owner of the mutual companies. On the other hand, stock companies are owned by stock holders. These stock holders may not necessarily have stock insurances under their names. Demutualization of mutual insurers and formation of hybrids known as mutual holding company became prevalent in many places like the United States of America. There are some other forms of insurance companies as well. These include reciprocals where insurers reciprocate in sharing risks. Insurance companies also have their own ratings. There are various organizations and agencies which publish ratings on basis of various parameters. One such agency is A.M Best. The ratings highlight the economic strength of the company, which is a measure of its capacity to pay back the claims of the policy holders. It also ranks financial instruments issued by the concerned company like bonds, notes and other products related with the security factor. Reinsurance companies are organizations which sell insurance schemes or policies to other insurance companies, thereby also allowing them to reduce their risk factor and to protect themselves from incurring extremely large losses. This market is lead by a few companies which have become tycoons in this field. These companies usually have huge reserves. A reinsurer can also be the direct formulator of the insurance risk factors. Another term we need to know is captive insurance. This actually refers to limited purpose insurance companies. They have a well defined objective of sponsoring risks originating from their source group or groups. The definition is often stretched to include some of the risks of the parent company’s clientele. It is almost like an in house self insurance vehicle. Captives can take many forms. One such forms maybe that of a pure entity of a mutual captive. This captive insures the collective risks of members of a particular organization which is a full subsidiary of the self insured parent company. They may also take up the form of an association captive that self insures individual risks of members of a professional or commercial group. Captives symbolize commercial as well as economical profit to their sponsors. This is because they hugely reduce costs and make insurance risk management very easy. They also increase the flexibility for cash flow generation. Apart from this, they also provide coverage for risks that are usually not available in the age old traditional markets. Also, the service is at a more reasonable price. The kinds of risks that are document able by a captive for its parents include property, damage, public and product liability, professional indemnity, employee benefits, employer related liabilities, motor expenses and medical expenses. Reinsurance partially limits the captive’s exposure to such risks. Captives have become an increasingly important component of risk management and risk financing strategies of their parents with passing time. This can be understood by noting the following facts:
There are some companies known as insurance consultants. They act like mortgage brokers. Customers pay them a certain amount as fee. In return they shop around for the best insurance policy scheme for the concerned customer. In plain and simple words, they try and get you the best possible insurance deal. Sometimes, the insurance company pays commission to these agents. In such a case, the agents receive no fee from the customers. Insurance brokers and consultants are not insurance companies. So during any kind of transaction, no risks are transferred to them. Sometimes third party companies perform the tedious tasks of underwriting and paying back or assessing claims. These companies obviously have panels consisting of special expertise. The economical stability of any insurance agency should always be a top priority of any person seeking insurance. You should always judge a company properly before getting into a contract with them. An insurance premium paid in the present date may compensate you for your losses that will be incurred many, many years later. This is exactly the reason why the viability of the insurance carrier becomes even more important. In the recent past, many insurance companies became insolvent overnight, thereby leaving their policy holders with absolutely no coverage. Rating agencies also provide a detailed account of a company’s viability. You must always check these before investing. The global insurance industry is evolving drastically with time. Legalization is a major process and insurance is more of a legal matter than an economic one. Statistics show that global insurance premiums grew by 11 % in 2007 (which is equivalent to 3.3 % in real terms) and reached a whopping 4.1 trillion dollars. The macroeconomic upliftment was a slower financial growth in 2007. This concept is known as moral hazard. Thus to reduce this hazard, companies have now come up with strict contractual clauses. These contractual clauses state that coverage will not be provided if the insured engages in any kind of conduct that grossly magnifies their risk of loss or liability. We can take an example here. For e.g. life insurance companies will charge higher premium or altogether deny coverage to people working in extremely hazardous conditions. Similarly liability insurers will not over misdeeds of the insured if they are committed intentionally. These include intentional torts. Also the public policies of every state take care of this aspect and thus insurance is not as easy to obtain as it sounds. Also insurance policy contracts are extremely complex. Some insurance policies are so very complex that the policy holders may not understand the entire process at all. As a result, less informed people may be tricked into buying unfavorable policies. This is the reason why many countries have formulated special rules and regulations regarding these aspects. This also includes strict vigilance over the way insurance policies are advertised. Most insurance policies in the English language have been drafted with extreme care and in very plain and simple English. Many buyers buy insurances through insurance brokers. While it may appear to you that the broker represents the buyer and not the insurance company, deep inside the matter is something else altogether. Brokers generally receive commissions from insurance companies. Thus it is their unofficial duty to be loyal to their patrons and get them lots of customers. Thus in most cases these brokers can go to any extent to fool the customers and getting their work done. Thus you should always do a thorough research yourself and choose the insurance policy with a lot of care. It is very difficult to find an honest insurance broker. Most of them will coax you into buying insurance from a particular company. You may also purchase your insurance through an agent. An agent is a little different from a broker. An agent officially represents the company from which the policy is bought by the customer. An agent can represent several companies at a single point of time. Independent acts similar to an attorney. It advises the policy holders on a fee for service retainer. It thus offers completely independent advice. This is absolutely free from financial conflict of agents and brokers. Another very important term is redlining. It is essentially an act of denying insurance coverage in certain geographical locations. These areas are usually at a very high risk of incurring losses. This is an act of unlawful discrimination. Racial profiling or redlining has a huge historical background in the field of property insurance, especially in the United States of America. Through a review of underwriting materials, marketing materials, court documents, research by government agencies, industry and community groups, it is pretty evident that race has always affected insurance rules and regulations and other practices. The federal trade commission once insured a report that presented the results of a research concerning credit based insurance scores and automobile insurance. It showed that the scores were effective in predicting the claims of consumers. All places have provisions in their law system or trade practices that condemn unfair discrimination which is referred to as redlining. This is extremely essential as it will ultimately help to curb malpractices and will enhance the global economy. Insurers consider a lot of quantifiable factors such as credit scores, gender, profession, status, educational qualification, etc in order to set the insurance rates and premium structures. More than often the use of these standards is considered unfair and discriminating in nature. This has caused many political disputes and uprisings all across the world in the past. An underwriter essentially performs the extremely difficult job of evaluating a given risk to the probability that a loss will be incurred. Factors causing greater chances of loss will be charged higher rates as is obvious. This is one major principle that has to be stringently followed by the companies if they wish to remain solvent. Thus discrimination against the risk factors is a necessary evil for the insurance industry to survive. For e.g. old people will be obviously charged a greater premium as compared to young people as they are at a greater risk of loss. However, other forms of discrimination like caste, creed, sex, colour, race, etc is unlawful and redlining. The government should thus lay more emphasis on the insurance industry. Stricter laws should govern the insurance business so that no unfair treatment is meted out to any person. We also need to understand what an insurance patent is. It is very similar to a scientific invention patent that is often sought by an inventor. Newly invented or formulated insurance products can be protected from copying. This is possible through the help of business method patent in the United States of America. We shall give you a very recent example of this unique business method patent. The usage based auto insurance is one of the most recent business methods to have been patented. This means that the idea of this product cannot be copied by anybody else. Thus anybody trying to plagiarize shall be penalized. Early versions were independently invented and patented by a big American auto insurance company called the progressive auto insurance. There was also a very famous Spanish inventor known as Salvador minguijon perez. Most stand alone inventors are in favour of patenting new insurance products. This gives them a sense of security and protection from big companies when they launch their new products in the insurance market. More than 70 % of the American patent applications come from independent inventors. On the other hand a few insurance bodies are strongly opposed to the patent of insurance products. This is because it creates newer risks for them. Insurance patent is becoming an extremely important field of patent. Thus in a nutshell we brought to you various aspects of the insurance industry. We spoke to you about the basic principles of insurance. We defined a few technical terms. We acquainted you with underwriting and claim. We also spoke of the background and history of insurance. We also brought forward a modern day statistical view of insurance as has been laid down by many giant rating agencies. We told you about various types of insurances including home, health, life, property, accident, credit, etc. we brought a clear and unbiased view of companies, brokers and agents to you. By now you must be having a good basic knowledge of insurance. Thus we hope that you shall now be able to judge insurance companies on your own.
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Insurance is essentially a form of risk management to hedge against risks of contingent loss.
through underwriting wherein insurers select what risks they shall insure and decide how much premium they should charge for it. Secondly, insurers invest the premiums that they collect from insured parties or individuals. The most complex part of any insurance business is the underwriting of insurance policies. The assortment of data is used to predict the probability that a claim will be made. This process is carried out by a method known as actuarial science. In this technique, data is analyzed to rightly project the rate of future claims based on some given risk. Actuarial science makes use of statistics and probability to analyze the risks related to the range of perils covered. These principles again are used to decide what the overall exposure of an insurer is. When a policy ends, the amount of premium collected and the investment gains minus the amount paid out in claims is termed as the insurer’s underwriting profit in context of that policy. The underwriting performance of an insurer is measured in terms of its combined ratio. The combined ratio is obtained by adding the company’s loss ratio to the expense ratio. The combined ratio is a reflection of the company’s overall underwriting profit. If the combined ratio is less than 100 percent then it indicates profit else loss is indicated. Insurance companies also gain investment profits on float. It is an available reserve at any given moment that an insurer has collected in insurance premiums but has not paid as part of any claim. Insurers always invest the insurance premiums as soon as they are collected and continue to benefit from them until the claims are paid out. According to statistics, the year 2003 saw an underwriting loss of property companies of 142.3 billion dollars in the United States of America. However, for the same period, the gross profit came out to be 68.4 billion dollar. This profit was obviously because of the float money. Hank Greenberg believes that it is not possible to sustain a profit from float forever. An underwriting profit is also required in such a case. However, there are many who do not agree with this opinion. The float method is pretty tough to implement continuously in a depression period. Bear markets cause insurers to sway from investing and makes them toughen their underwriting standards. Thus high premiums usually prevail in a poor economy. This phenomenon of shifting between profitable and unprofitable periods in a period of time is known as underwriting or an insurance cycle. Currently, the maximum amount of money is made by property and casualty insurers from their auto insurance line of business. Underwriting on this line has benefited a lot due to great advancements in computing. Also property losses in the United States of America have worsened this trend.
Let us now trace back the history of insurances. There is a lot to be said in this context. We can say that insurance appeared almost at the same time as when human society started developing. There have always been two kinds of economies in the human society – the money economy and the non money (other resources) economy. The latter is obviously older than the former as money was not invented when society just began to develop. In such kind of an economy, insurance would usually mean one person helping another in times of need. For e.g. if somebody’s house I destroyed due to a fire or any natural calamity then all the other members of the community would help the victim to rebuild his house. This fact implies for all neighbours. They are supposed to help their community members if anybody is in trouble. This is kind of an unwritten agreement. If a person does not help out then chances are that he will not be helped when in need. This type of insurance is still practiced in many places where the monetary economy is not at all well developed. The modern day insurance probably originated in china or Babylon. Early methods of transferring risk were practiced by the Chinese and Babylonian traders in the 3rd millennium BC. The Babylonians had devised a unique system which was recorded in the unique code of Hammurabi. This was practiced by almost all Mediterranean merchants. The first person to insure people was the monarch of ancient Persia. They also made it an official process by registering it in the government notary offices. This process was carried out at the beginning of every Iranian New Year which was called Norouz. The heads of all groups gifted presents to the monarch on this occasion. The most important gift was reserved for a special ceremony. If a gift was worth more than 10000 achaemenian gold coins then the issue was registered in a specific office. This was a tradition in ancient Persia. For all others, the gifts were judged by the confidants of the court. This judgment was registered in specific offices. The entire purpose of this ceremony was very simple. All subjects would gift presents to the monarch. In return, the monarch would be obliged to help his subjects out if they are in trouble at any point of time. This was a give and take relationship that existed between the monarch and his subjects in ancient Persia. This is a very primitive type of insurance that prevailed in central asia. There was another system as well which stated that whenever the insured was in need of money, he would receive double the amount of the premium if his gifts were worth more than 10000 derrik. This is also mentioned in a book by the noted historian Jahez. A long time after the Persian monarchs, the residents of Rhodes invented the concept of general average. Merchants who were shipping their goods would pay the premium proportionally divided among them. This money would be later used to reimburse anybody whose goods got lost in storm or sinkage. The origin of health insurance dates back to the Greeks and romans in 600 AD. They used to organize guilds which were then called benevolent societies. These guilds took care of families and paid for the expense of funerals if a member died. Guilds in the Middle Ages also were used for similar purpose. These were an informal form of insurance. No legality was involved in these bodies. The Talmud also deals with various facets of insuring goods. Before formal insurance was introduced, something called a friendly society existed in Britain. People would donate a lot of money to these institutes so that the money could be put to use in case of any emergency. Individual insurances were started in Genoa in the 14th century. Insurance pools backed by pledges of landed estates were also first heard of in genoa. This new form of insurance allowed the insurance to be separate from the investment. This separation was first found fruitful in marine insurance. With time, insurance too began to grow into a more sophisticated form of legal security. A few types of insurances had developed in London in the 17th century.
The company will act as per the clauses of the insurance policy. This kind of insurance provides medical, property and liability coverage. These can be further elaborated as follows. Property coverage deals with the damage or theft of your car. Liability coverage deals with your legal responsibility in case you cause the accident of some other person. Medical coverage pays for the injuries caused in a vehicle accident. Auto insurance policies consist of six types of coverages. Most nations will oblige you to buy all of the six. Most auto insurances are for 6 months or a year after which they have to be renewed. In the United States of America, insured people are notified when their insurance is about to expire. Another type of insurance is home insurance. It provides compensation if home is damaged due to any disaster. In certain places rules regarding home insurance are a little different as these places are prone to floods or earthquakes. The National Health Service (NHS) issued a number of health insurance policies in the United Kingdom. These policies covered the cost of medical treatments. Dental insurances also exist which protect the insured against dental costs. In the United States of America, dental insurances come as part of all health insurance packages. This is also true for most of the countries across the world. Health insurances are given a lot of importance by the common people. It counts over several other types of insurances such as property, fire, etc. as we say, health is wealth. There are various insurance packages available for mishaps like accidents, illness and also unemployment. These can further be subdivided into groups and explained in further detail. We have something called disability insurance. Under this scheme, insurance policies provide financial backing in case the policy holder cannot do his or her job due to any physical disability or wound. It also helps the insured to pay credit card bills, mortgages and other monthly bills. Another type of insurance is known as the disability overhead insurance. This policy enables business owners to cover all their business expenditure if and when they are unable to work. Obviously, these policies are always under strict vigilance and also have strict rules of implementations.
business incurs when it is not able to run its dail errands due to this fire. Insurance sometimes also covers the failure of a creditor to pay what it owes to the insured. This type of insurance policy is called business interruption insurance. Certain bonds known as fidelity and surety bonds are also included in this group. But these products provide benefits to a third party which is referred to as the oblige. The insured in this case is known as the obligor. This insurance comes into play when the insured fails to live up to contract with the third party. There are also kidnap and ransom insurances. However, these require extreme legal detailing and are thus very rare. Then again we have legal expenses insurance. These cover a policy holder against potential legal costs. Locked funds insurance is not much known. It is a hybrid insurance scheme jointly issued by governments and banks. It prevents unauthorized parties from tampering public funds. In certain specific cases, the government may allow it to protect semi private funds that are liable to any kind of tampering. These insurances usually have very strict terms. Thus it is used in extreme cases or in other words, rarely used. Media insurance is also a popular concept. It usually protects professionals in the field of film making, video and TV production. Similarly, nuclear incident insurance covers damages that result from any incident related to radioactive materials. These are generally arranged at the national level. You also have pet insurances. These will reimburse in case of medical expenses incurred during the treatment of a suffering pet. Some companies arrange for wellness rituals as well. Pollution insurance consists of first party coverage of insured property by external or site sources. Liability coverage of third parties from impure air, water, land, etc is also taken care of. This kind of policy also covers cleanup costs and includes coverage related to releases from underground storage tanks. Purchase insurance is also a protective measure against products people purchase. It also covers individual purchase production, warranty, guarantee, care plan and cell phone insurance. Normally, these are very limited in terms of their scope. Then we also have some forms of insurance such as title insurance. This provides a guarantee or promises that title to real property is vested in the buyer. It is performed during a real estate transaction. People who frequently travel abroad usually opt for travel insurance as these cover almost all kinds of losses faced in a foreign land. Insurance of financial vehicles is also an important topic to be dealt with. Fraternal benefit societies provide fraternal insurance on a cooperative basis. This is also sometimes provided by other organizations. There is another type of insurance known as the no fault insurance. It is a policy which indemnifies the policy holders regardless of the fault in a case accident. There is an alternative risk financing mechanism known as protected self insurance. In this kind of a scheme, an institute or organization retains the calculated cost of risk within the organization. It transfers the catastrophic risks with mentioned limits to the insurer so that the maximum cost or budget of the program is known.
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