Insurance

Life Insurance Savings: 5 Ways to Save in 2008

2008-07-08T06:51:00.000-07:00

Happy New Year! Now that 2007 is over, it is time to think of the resolutions you want to make for 2008. According to USA.gov, the five most popular New Years resolutions were as follows: 1) lose weight, 2) pay off debt, 3) save money, 4) get a better job, and 5) get fit. Maybe your resolution made the top 5? If your resolution is to save money this year, or you need to save to pay off your debt, one way to save that you might not be aware of is finding savings on your life insurance policy.

There are five basic ways to save on your life insurance policy: (i) shop around and compare multiple quotes; (ii) select the term length that is appropriate for you; (iii) buy only the amount of coverage you need; (iv) check for price breaks; and (v) buy when you’re young.

Shopping Online and Comparing Multiple Quotes
The amount you pay for term life protection depends on the amount and term-length of your policy, your health and age, and the insurance company you select. To find the best price though, make sure to shop and compare quotes from multiple companies. As you will learn, the cost of the same policy can vary by hundreds of dollars among different insurance companies. Just as your needs are always changing, so are term life insurance rates.

Selecting the Appropriate Length of Coverage
Everyone has different life insurance needs; therefore, there isn’t a one size fits all solution when it comes to term life insurance. While it may make sense for people in their 30s and 40s to secure a 20-year term length, a 10-year term might be more appropriate for someone nearing retirement. Individuals who have 30-year mortgages for example, might consider a 30-year term life policy to ensure that the home is protected throughout the life of the loan.

Determining the Right Amount of Coverage
In shopping for term life insurance, many agents may try to sell you more coverage than you need. Understand that the purpose of life insurance is to replace financial loss, and what most people should be looking for is income replacement” for their beneficiaries. Financial planners recommend a policy amount at least equal to 6-10 times your annual gross income.

Checking for Price Breaks: Paying Less for More
Insurance companies are known to offer price breaks at certain coverage amounts (e.g., $500,000 vs. $750,000). Many people can actually pay less money for more coverage. Check how little your prices increase when you when you change your coverage to $250,000, $500,000, or $1,000,000.

Buying When You're Young
While your financial needs may be lower at a younger age, the rates are also substantially cheaper when you're young. The best advice is to lock in as much protection at a young age while your health and prices are still good to avoid paying substantially more when a shorter-term policy expires.

Even if saving money wasn’t your top resolution for 2008, saving money on your life insurance policy is easy enough that you can achieve two New Years resolutions this year.

5 Tips to Lowering Your Homeowners in 2008

2008-07-08T06:50:00.000-07:00

Continuing our focus on using the New Year to put financial matters in order, we turn our focus to saving on homeowners insurance. You should review your homeowners policy at least every 12 months, or more often if your needs change. Significant discounts and savings may have become available since your last policy review. Homeowners insurance premiums can vary by hundreds of dollars from one company to another for the same coverage.

1. Raise Your Homeowners Deductible: Save up to 25%
The lowest hanging fruit for homeowners insurance savings may be to increase your deductible. According to the Insurance Information Institute (III), if you can afford to raise your deductible to $1,000 from $500, you may save as much as 25% on your annual premium.

Remember, homeowners insurance is not intended for small fix-it claims, therefore, the benefits of a lower deductible can be quickly dissolved by the higher rates that you will experience after making such claims. As homeowners insurance intended for major peril, consider higher deductibles and collect the savings in the cost of your premium.

2. Multi-line Policy Insurance Discounts: Save up to 15%
Purchasing your homeowners insurance and your car insurance from the same insurance carrier could save you up to 15% on both premiums.

3. Additional Security and Safety: Save up to 20%
Have you added new security devices to your home in the last year; perhaps a deadbolt lock, window locks, or even and an alarm system? Insurance companies highly value the protection afforded by fire sprinkler systems, burglar alarms, and fire alarms — especially those connected to monitoring agencies such as your local police and fire department. Accordingly, some carriers reduce premiums by as much as 20% if you install some of these features.

4. Discounts for Home Improvements
A new home's electrical, heating, and plumbing systems, and overall structure for that matter, are likely to be in better condition than those of an older home. Accordingly, their insurance rates are generally lower as the risk for a potential claim is mitigated. If you have made any home improvement in the past year, you should see if a new policy will reward you with policy discounts.

5. Eliminate Coverage You Don’t Need: Analyze Your Homeowners Limits
Ideally, you want your policy to cover any major purchases or additions to your home, but you should not spend money for coverage that you don't need. You may have jewelry, appliances, electronics, and other valuable possessions that depreciate over time; therefore, it is in your financial best interest to compare the limits of your homeowners policy to the actual value of your possessions at least once every year.
Homeowners insurance rates are always fluctuating and vary from company to company.

Taking time to review the amount of homeowners insurance that you need will help you from buying more coverage then you need. Also, taking time to compare multiple homeowners insurance quotes will help you find the right amount of homeowners insurance that fits your budget.

10 Ways Your Car Insurance Can Help You Get Ahead in 2008

2008-07-08T06:49:00.000-07:00

With the arrival of 2008 comes a new time to make resolutions, and hopefully keep them. While some may vow to quit smoking, lose 5 pounds, or start saving more money, this is the perfect time to start reaching your goals. One way to save some extra money that you might not be conscious of is lowering your car insurance rates. While comparing car insurance quotes is the best way to save money, there is still between 20% and 30% of the population that doesn’t comparison shop.* Here are InsWeb’s Top 10 Ways to Save on car insurance.

1. Shop and Compare Rates Every 6 Months
In 2008, if you check your car insurance rates in January, make sure your check them again in June. According to an independent study, people who compare rates and switch carriers at InsWeb.com save an average of $301* on a six month policy. Consider the savings over 12 months! Tickets or no tickets, you’re a different driver than you were last summer. Get updated quotes and see what your individual savings could be.

2. Select Higher Deductibles
Simply put, the higher your deductible, the lower your premium. Indeed the cost of an accident will be that much more expensive; however, if the damage is minor (grey zone in making accident claim), you’ll be spending the same out-of-pocket amount regardless.

3. Make a Cheaper Policy Even Cheaper: Don’t Pay in Monthly Installments
Additional administrative fees are commonly applied to payments when you split your premium in to installments (i.e. monthly, semi-annual, annual). Be aware that a monthly fee of even $7 can add up to $84 over 12 months.

4. Look for Multi-Line Insurance Discounts
The most under recognized car insurance discount results from the multi-line insurance policy: buying your auto insurance and your homeowners insurance from the same insurance company. According to the Insurance Information Institute, a multi-line policy can save you up to 15% on both premiums.

5. Collect on Your Good Driving
Most insurance companies reward good driving with lower premiums. In fact, in some states a good driving discount is required by law. If you haven't had any accidents or tickets in the last three to five years, shop at InsWeb.com and see whether you are missing out on this money savings discount.

6. Don't Overpay for Tickets
Unfortunately moving violations are an accurate reflection of your liability to an insurance company, and your rates can skyrocket as a result. Perhaps you deserve a higher rate, but don't let the insurance company unduly punish you. Shop around and see if you can find a more reasonable rate with another company.

7. Look for Safe Vehicle Discounts
Many companies offer discounts for various safety features on your vehicle, including air bags, alarms, factory-installed mechanical seatbelts and antilock brakes. In getting updated insurance quotes, be sure to indicate such safety features to benefit from available discounts.

8. Don't Overpay for Your Unnecessary Coverage
You may be paying for coverage that you don't need. For example, you may be a member of an auto club that provides towing services, yet you're also paying for towing on your auto insurance policy. Look for opportunities to eliminate unnecessary costs.

9. Look for a Good Student Discount or Senior Discount
Students currently enrolled in school often receive a discount on auto insurance for good grades, as many companies feel conscientious students make conscientious drivers. Similarly, insurance companies are known to value the wisdom of an experienced driver, offering discounts to drivers over 50 as a result.

10. Pay Less for Driving Less
Many insurance companies will offer discounts on vehicles that incur low annual mileage. In fact, some companies have a predetermined number of what they consider low mileage. Has your commute changed? If so, it might save you money to get an updated quote.

The Gas Price Crisis: 10 Cars That Cost More at the Pump

2008-07-08T06:47:00.000-07:00

Lately the news has been jam-packed with reports about soaring oil and gas prices. We all feel a little extra squeeze at the gas pump these days with the average gas price now up to almost $3.30 a gallon, and experts predicting the price of gas to top $4 per gallon in some states this summer.

10 Cars with Surprisingly Bad Gas Mileage
	MPG City	MPG Hwy
2008 Saab 9-7x Aero	12	16
2008 Jeep Wrangler	15	19
2008 Jeep Liberty	15	21
2008 Saturn Vue XE	15	22
2008 Pontiac G6 GT	15	22
2008 Mazda RX-8	16	22
2008 Mazda CX-7	16	22
2008 Volvo S80	16	24
2008 Pontiac Solstice	19	24
2008 Saturn Sky	19	24

Many people have decided to purchase smaller, more fuel efficient and environmentally safer cars. However, if you drive one of these cars, you could end up costing you more at the gas pump. Even if you have a car that doesn’t get the greatest gas mileage, there are still simple measures you can take to save money on gas.

Shop for Car Insurance (Could Save $301 a Year)
Shopping for car insurance is a great way to save money. InsWeb consumers save an average of $301* on a 6-month policy. This savings becomes increasingly significant as gas prices continue to rise. Experts predict that if gas reaches the $4 a gallon mark, families will be spending an extra $400 on gas in 2008. The money you can save on your car insurance can help offset additional gas expenses.

Keep Your Car Tuned-Up (Save 11.4 Miles per Gallon)
Some mechanics estimate that a poorly tuned engine can use up to 50% more gas than one that is running well. In fact, according to the National Car Care Council (www.carcare.org), if you combine under-inflated tires, a dirty air filter, worn spark plugs, a worn oxygen sensor, dirty oil, and a loose gas cap, you could be losing up to 11.4 miles per gallon.

Keep Your Tires Properly Inflated (Save 3.3% on Gas)
Underinflated tires will cause you to consume more gas. The U.S. Department of Energy says that drivers can save an average of 3.3% on gas by keeping their tires properly inflated. The proper inflation for your tires should be specified in your owner’s manual.

Drive at Steady Speeds
Experts estimate that for every 5 mph you drive over 60 mph, you are effectively adding $0.10 to $0.20 to each gallon of gas you purchase. Stop-and-go traffic adversely affects your gas mileage; since you are using gas but not going anywhere. If possible, try to avoid areas where traffic gets congested. Also, when that red light turns green, you don’t have to take off like a drag racer. Controlling the “horses” under your hood can reduce the amount of gas you use.

Minimize Your Time in Your Car

The best way to save on gas is curtail your driving. Carpooling with friends or coworkers can help reduce your gas consumption and save you money. Scheduling a day where you can get all your errands done, instead of making a bunch of shorter trips during the week, can also reduce the amount of fuel you use.

Who Pays More for Car Insurance - Men or Women?

2008-07-08T06:46:00.000-07:00

Who are better drivers - men or women? As with most Battle of the Sexes debates - each gender can make a legitimate case. Women may claim they're safer drivers and less prone to road rage, while men may argue they're more adept at driving at high speeds and avoiding obstacles on the road. The debate can continue ad nauseam. But insurance companies can use statistics to answer the question - who pays more for car insurance - men or women?

Do Men Pay Higher Auto Insurance Rates than Women?
Car insurance companies base your rates on how high of a risk you are to insure. In 2006, nearly 30,000 male drivers died in car accidents, while only 13,000 women suffered the same fate (IIHS).

Because male drivers are more likely to die in a car accident, car insurance companies perceive them to be a higher risk to insure, especially young male drivers who just got their license. Consequently, young male drivers aged 16-25 typically pay more for auto insurance than young female drivers in the same age group.

Good News for Male Drivers
The good news for male drivers is that they are only perceived as a higher risk to insure from the ages of 16 to 25. Once you reach age 25, as long as your driving record is devoid of accidents and tickets, your car insurance rates should start to decrease and will eventually become level with your female counterparts. While this news can be disheartening to young male drivers, they can take solace that their car insurance rates will gradually decrease over time as long as they maintain a clean driving record.

Men and Women Can Both Save on Car Insurance
While both genders can continue to argue which sex is the better driver, one thing we all can agree on is that saving money on your car insurance benefits everyone. If you have a teenage driver, especially a male teenage driver, you can still find discounts on your car insurance. While you are in school, car insurance companies usually offer good student discounts if you maintain a "B" average or better. Men and women alike can raise their deductibles to make their car insurance rates a little lower as well. When looking for car insurance at any age, comparing quotes is the best way to find the best rates.

Create Your Own Home Insurance Stimulus Plan in 6 Easy Steps

2008-07-08T06:45:00.000-07:00

Beginning this month, 130 million American households will begin receiving their economic stimulus payments. This is particularly good news for homeowners. In addition to the tax rebates of $600 for individuals and $1,200 for working couples, Americans with more expensive homes will now be able to refinance their homes at cheaper rates. While this economic plan will provide much needed relief for many borrowers, homeowners can experience long-term benefits by creating their own Home Insurance Stimulus Plan.

Home Insurance Stimulus Plan: 6 Easy Steps
You can create long-term savings by implementing your own Home Insurance Stimulus Plan. There are six easy steps you can take to lower your home insurance payments - (1) comparison shopping; (2) raising your deductible (3) taking advantage of available discounts; (4) adding an alarm or security device; (5) having your carrier recognize certain home improvements; and (6) eliminating unnecessary coverage can all help save you money in the long-term.

1. Comparison Shopping: The Best Way to Save on Home Insurance
The number one way to save money on your homeowners insurance is to shop around for coverage. Homeowners insurance rates are always fluctuating and vary from company to company. If you've just purchased or are about to purchase a new home, compare several quotes before choosing a home insurance provider. If you're a long-time homeowner, review your current rates and compare them to rates offered by other carriers. Your current company could be overcharging you, and it only takes a few minutes to compare rates. Switching companies can potentially save you a significant amount of money.

2. Raise Your Homeowners Insurance Deductible: Save up to 25%
Another great way to save money on your home insurance is to increase your deductible. According to the Insurance Information Institute (III), if you raise your deductible from $500 to $1,000, you may save as much as 25% on your annual premium.

Remember, homeowners insurance is not intended for small fix-it claims. Therefore, the benefits of a lower deductible can be quickly dissolved by the higher rates you'll experience after making such claims. As homeowners insurance is intended for major perils, consider higher deductibles and collect the savings resulting from a lower premium.

3. Multi-line Policy Insurance Discounts: Save up to 15%
Purchasing your homeowners insurance and your car insurance from the same insurance carrier could save you up to 15% on both premiums.

4. Additional Security and Safety: Save up to 20%
Have you added new security devices to your home in the last year; perhaps a deadbolt lock, window locks, or even an alarm system? Insurance companies highly value the protection afforded by fire sprinkler systems, burglar alarms, and fire alarms -- especially those connected to monitoring agencies such as your local police and fire departments. Accordingly, some carriers will reduce your premium by as much as 20% if you install some of these home security devices.

5. Discounts for Home Improvements
A new home's electrical, heating and plumbing systems, and overall structure for that matter, are likely to be in better condition than those of an older home. Accordingly, their insurance rates are generally lower as the risk for a potential claim is reduced. If you've made any home improvement in the past year, see if you'll be rewarded with policy discounts.

6. Eliminate Coverage You Don't Need: Analyze Your Homeowners Limits
Ideally, you want your policy to cover any major purchases or additions to your home, but you shouldn't spend money for coverage you don't need. You may have jewelry, appliances, electronics and other valuable possessions that depreciate over time. Therefore, it's in your best financial interest to compare the limits of your homeowners policy to the actual value of your possessions at least once every year.

How to Determine if Your Home is Underinsured

2008-07-08T06:42:00.000-07:00

If you were to lose your home in a fire, would you have enough homeowners insurance coverage to rebuild your home and replace your possessions? You'd also need a place to live while your home is being rebuilt.

Does your policy contain a Loss of Use provision that will help pay for hotel, restaurant and other expenses accrued while you're displaced? Chances are your homeowners insurance isn't going to provide you with enough coverage to resume the lifestyle to which you've grown accustomed should a disaster strike.

Homeowners Don't Know They Are Underinsured
Homeowners are spending billions of dollars a year to add onto their homes, but most of them don't update their homeowners insurance coverage which leaves them grossly underinsured.

According to a Marshall & Swift / Boeckh survey, 66% of U.S homes are undervalued for the purpose of insurance by an average of 18%. If you add a new deck to your home, but fail to notify your homeowners insurance provider, you could end up underinsured.

How Much Homeowners Insurance Coverage Do You Need?
Many homeowners might be unaware of how much homeowners insurance coverage they need. You need enough coverage to protect your home and assets in case of a worst case scenario and your home is lost due to a covered disaster. You need to review your policy at least once a year to make sure all your belongings are covered.

Homeowners insurance policies can be broken down into four categories - structures, possessions, living expenses and liability:

Structures
You generally want to have coverage equal to at least the amount of your mortgage. Your policy should cover rebuilding costs. And if you've recently remodeled your home, you need to update your coverage to cover these additional renovations.

Possessions
Your homeowners policy will also cover your possessions. You may choose between replacement coverage (the cost to replace each item) and actual cash value coverage (the item's original value less depreciation). If you have valuable jewelry, an art collection or a state-of the-art home theater system, you should consider purchasing additional coverage to cover these items.

Living Expenses
This often overlooked coverage will provide you with coverage for hotel, restaurant and other miscellaneous expenses you may accrue if your home is rendered uninhabitable by a covered disaster.

Liability
Most policies offer a base amount of liability coverage - typically $100,000. However, if you have a swimming pool or a dog whose breed is aggressive by nature, you may want to consider increasing your limits.

Review Your Policy
The most effective way to know if you have enough insurance is to maintain a home inventory that you update regularly, and check your homeowners insurance policy at least once a year. Keeping your home inventory up-to-date will help you determine how much homeowners insurance coverage you need. After updating your home inventory, you may find you need to increase your coverage.

Even if you need to add more coverage to your homeowners insurance policy, there are still ways to keep your rates low. The best way is to compare multiple homeowners insurance quotes to find the right policy with the best price. Nothing is more costly than having an underinsured home.

Insurance Definition

2008-07-04T20:09:00.001-07:00

Insurance, in law and economics, is a form of risk management primarily used to hedge against the risk of a contingent loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium. An insurer is a company selling the insurance. The insurance rate is a factor used to determine the amount, called the premium, to be charged for a certain amount of insurance coverage. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice.

Principles of insurance

Commercially insurable risks typically share seven common characteristics.^[1]

A large number of homogeneous exposure units. The vast majority of insurance policies are provided for individual members of very large classes. Automobile insurance, for example, covered about 175 million automobiles in the United States in 2004.^[2] The existence of a large number of homogeneous exposure units allows insurers to benefit from the so-called “law of large numbers,” which in effect states that as the number of exposure units increases, the actual results are increasingly likely to become close to expected results. There are exceptions to this criterion. Lloyd's of London is famous for insuring the life or health of actors, actresses and sports figures. Satellite Launch insurance covers events that are infrequent. Large commercial property policies may insure exceptional properties for which there are no ‘homogeneous’ exposure units. Despite failing on this criterion, many exposures like these are generally considered to be insurable.
Definite Loss. The event that gives rise to the loss that is subject to insurance should, at least in principle, take place at a known time, in a known place, and from a known cause. The classic example is death of an insured on a life insurance policy. Fire, automobile accidents, and worker injuries may all easily meet this criterion. Other types of losses may only be definite in theory. Occupational disease, for instance, may involve prolonged exposure to injurious conditions where no specific time, place or cause is identifiable. Ideally, the time, place and cause of a loss should be clear enough that a reasonable person, with sufficient information, could objectively verify all three elements.
Accidental Loss. The event that constitutes the trigger of a claim should be fortuitous, or at least outside the control of the beneficiary of the insurance. The loss should be ‘pure,’ in the sense that it results from an event for which there is only the opportunity for cost. Events that contain speculative elements, such as ordinary business risks, are generally not considered insurable.
Large Loss. The size of the loss must be meaningful from the perspective of the insured. Insurance premiums need to cover both the expected cost of losses, plus the cost of issuing and administering the policy, adjusting losses, and supplying the capital needed to reasonably assure that the insurer will be able to pay claims. For small losses these latter costs may be several times the size of the expected cost of losses. There is little point in paying such costs unless the protection offered has real value to a buyer.
Affordable Premium. If the likelihood of an insured event is so high, or the cost of the event so large, that the resulting premium is large relative to the amount of protection offered, it is not likely that anyone will buy insurance, even if on offer. Further, as the accounting profession formally recognizes in financial accounting standards, the premium cannot be so large that there is not a reasonable chance of a significant loss to the insurer. If there is no such chance of loss, the transaction may have the form of insurance, but not the substance. (See the U.S. Financial Accounting Standards Board standard number 113)
Calculable Loss. There are two elements that must be at least estimable, if not formally calculable: the probability of loss, and the attendant cost. Probability of loss is generally an empirical exercise, while cost has more to do with the ability of a reasonable person in possession of a copy of the insurance policy and a proof of loss associated with a claim presented under that policy to make a reasonably definite and objective evaluation of the amount of the loss recoverable as a result of the claim.
Limited risk of catastrophically large losses. The essential risk is often aggregation. If the same event can cause losses to numerous policyholders of the same insurer, the ability of that insurer to issue policies becomes constrained, not by factors surrounding the individual characteristics of a given policyholder, but by the factors surrounding the sum of all policyholders so exposed. Typically, insurers prefer to limit their exposure to a loss from a single event to some small portion of their capital base, on the order of 5 percent. Where the loss can be aggregated, or an individual policy could produce exceptionally large claims, the capital constraint will restrict an insurers appetite for additional policyholders. The classic example is earthquake insurance, where the ability of an underwriter to issue a new policy depends on the number and size of the policies that it has already underwritten. Wind insurance in hurricane zones, particularly along coast lines, is another example of this phenomenon. In extreme cases, the aggregation can affect the entire industry, since the combined capital of insurers and reinsurers can be small compared to the needs of potential policyholders in areas exposed to aggregation risk. In commercial fire insurance it is possible to find single properties whose total exposed value is well in excess of any individual insurer’s capital constraint. Such properties are generally shared among several insurers, or are insured by a single insurer who syndicates the risk into the reinsurance market.

Indemnification

Main article: Indemnity

The technical definition of "indemnity" means to make whole again. There are two types of insurance contracts; 1) an "indemnity" policy and 2) a "pay on behalf" or "on behalf of"^[3] policy. The difference is significant on paper, but rarely material in practice.

An "indemnity" policy will never pay claims until the insured has paid out of pocket to some third party; i.e. a visitor to your home slips on a floor that you left wet and sues you for $10,000 and wins. Under an "indemnity" policy the homeowner would have to come up with the $10,000 to pay for the visitor's fall and then would be "indemnified" by the insurance carrier for the out of pocket costs (the $10,000)^[4].

Under the same situation, a "pay on behalf" policy, the insurance carrier would pay the claim and the insured (the homeowner) would not be out of pocket for anything. Most modern liability insurance is written on the basis of "pay on behalf" language^[5].

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: the parties (the insurer, the insured, the beneficiaries), the premium, the period of coverage, the particular loss event covered, the amount of coverage (i.e., the amount to be paid to the insured or beneficiary in the event of a loss), and exclusions (events not covered). An insured is thus said to be "indemnified" against the loss events covered in the policy.

When insured parties experience a loss for a specified peril, the coverage entitles the policyholder to make a 'claim' against the insurer for the covered amount of loss as specified by the policy. The fee paid by the insured to the insurer for assuming the risk is called the 'premium'. Insurance premiums from many insureds are used to fund accounts reserved for later payment of claims—in theory for a relatively few claimants—and for overhead costs. So long as an insurer maintains adequate funds set aside for anticipated losses (i.e., reserves), the remaining margin is an insurer's profit.

Insurer’s business model

Profit = earned premium + investment income - incurred loss - underwriting expenses.

Insurers make money in two ways: (1) through underwriting, the process by which insurers select the risks to insure and decide how much in premiums to charge for accepting those risks and (2) by investing the premiums they collect from insureds.

The most complicated aspect of the insurance business is the underwriting of policies. Using a wide assortment of data, insurers predict the likelihood that a claim will be made against their policies and price products accordingly. To this end, insurers use actuarial science to quantify the risks they are willing to assume and the premium they will charge to assume them. Data is analyzed to fairly accurately project the rate of future claims based on a given risk. Actuarial science uses statistics and probability to analyze the risks associated with the range of perils covered, and these scientific principles are used to determine an insurer's overall exposure. Upon termination of a given policy, the amount of premium collected and the investment gains thereon minus the amount paid out in claims is the insurer's underwriting profit on that policy. Of course, from the insurer's perspective, some policies are winners (i.e., the insurer pays out less in claims and expenses than it receives in premiums and investment income) and some are losers (i.e., the insurer pays out more in claims and expenses than it receives in premiums and investment income).

An insurer's underwriting performance is measured in its combined ratio. The loss ratio (incurred losses and loss-adjustment expenses divided by net earned premium) is added to the expense ratio (underwriting expenses divided by net premium written) to determine the company's combined ratio. The combined ratio is a reflection of the company's overall underwriting profitability. A combined ratio of less than 100 percent indicates underwriting profitability, while anything over 100 indicates an underwriting loss.

Insurance companies also earn investment profits on “float”. “Float” or available reserve is the amount of money, at hand at any given moment, that an insurer has collected in insurance premiums but has not been paid out in claims. Insurers start investing insurance premiums as soon as they are collected and continue to earn interest on them until claims are paid out.

In the 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. ^[6]

Property and casualty insurers currently make the most money from their auto insurance line of business. Generally better statistics are available on auto losses and underwriting on this line of business has benefited greatly from advances in computing. Additionally, property losses in the US, due to natural catastrophes, have exacerbated this trend.

Finally, claims and loss handling is the materialized utility of insurance. In managing the claims-handling function, insurers seek to balance the elements of customer satisfaction, administrative handling expenses, and claims overpayment leakages. As part of this balancing act, fraudulent insurance practices are a major business risk that must be managed and overcome.

History of insurance

Main article: History of insurance

In some sense we can say that insurance appears simultaneously with the appearance of human society. We know of two types of economies in human societies: money economies (with markets, money, financial instruments and so on) and non-money or natural economies (without money, markets, financial instruments and so on). The second type is a more ancient form than the first. In such an economy and community, we can see insurance in the form of people helping each other. For example, if a house burns down, the members of the community help build a new one. Should the same thing happen to one's neighbour, the other neighbours must help. Otherwise, neighbours will not receive help in the future. This type of insurance has survived to the present day in some countries where modern money economy with its financial instruments is not widespread (for example countries in the territory of the former Soviet Union).

Turning to insurance in the modern sense (i.e., insurance in a modern money economy, in which insurance is part of the financial sphere), early methods of transferring or distributing risk were practiced by Chinese and Babylonian traders as long ago as the 3rd and 2nd millennia BC, respectively. Chinese merchants travelling treacherous river rapids would redistribute their wares across many vessels to limit the loss due to any single vessel's capsizing. The Babylonians developed a system which was recorded in the famous Code of Hammurabi, c. 1750 BC, and practiced by 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.

Achaemenian monarchs were the first to insure their people and made it official by registering the insuring process in governmental notary offices. The insurance tradition was performed each year in Norouz (beginning of the Iranian New Year); the heads of different ethnic groups as well as others willing to take part, presented gifts to the monarch. The most important gift was presented during a special ceremony. When a gift was worth more than 10,000 Derrik (Achaemenian gold coin) the issue was registered in a special office. This was advantageous to those who presented such special gifts. For others, the presents were fairly assessed by the confidants of the court. Then the assessment was registered in special offices.

The purpose of registering was that whenever the person who presented the gift registered by the court was in trouble, the monarch and the court would help him. Jahez, a historian and writer, writes in one of his books on ancient Iran: "[W]henever the owner of the present is in trouble or wants to construct a building, set up a feast, have his children married, etc. the one in charge of this in the court would check the registration. If the registered amount exceeded 10,000 Derrik, he or she would receive an amount of twice as much."[1]

A thousand years later, the inhabitants of Rhodes invented the concept of the 'general average'. Merchants whose goods were being shipped together would pay a proportionally divided premium which would be used to reimburse any merchant whose goods were jettisoned during storm or sinkage.

The Greeks and Romans introduced the origins of health and life insurance c. 600 AD when they organized guilds called "benevolent societies" which cared for the families and paid funeral expenses of members upon death. Guilds in the Middle Ages served a similar purpose. The Talmud deals with several aspects of insuring goods. Before insurance was established in the late 17th century, "friendly societies" existed in England, in which people donated amounts of money to a general sum that could be used for emergencies.

Separate insurance contracts (i.e., insurance policies not bundled with loans or other kinds of contracts) were invented in Genoa in the 14th century, as were insurance pools backed by pledges of landed estates. These new insurance contracts allowed insurance to be separated from investment, a separation of roles that first proved useful in marine insurance. Insurance became far more sophisticated in post-Renaissance Europe, and specialized varieties developed.

Toward the end of the seventeenth century, London's growing importance as a centre for trade increased demand for marine insurance. In the late 1680s, Mr. Edward Lloyd opened a coffee house that became a popular haunt of ship owners, merchants, and ships’ captains, and thereby a reliable source of the latest shipping news. It became the meeting place for parties wishing to insure cargoes and ships, and those willing to underwrite such ventures. Today, Lloyd's of London remains the leading market (note that it is not an insurance company) for marine and other specialist types of insurance, but it works rather differently than the more familiar kinds of insurance.

Insurance as we know it today can be traced to the Great Fire of London, which in 1666 devoured 13,200 houses. In the aftermath of this disaster, Nicholas Barbon opened an office to insure buildings. In 1680, he established England's first fire insurance company, "The Fire Office," to insure brick and frame homes.

The first insurance company in the United States underwrote fire insurance and was formed in Charles Town (modern-day Charleston), South Carolina, in 1732. Benjamin Franklin helped to popularize and make standard the practice of insurance, particularly against fire in the form of perpetual insurance. In 1752, he founded the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire. Franklin's company was the first to make contributions toward fire prevention. Not only did his company warn against certain fire hazards, it refused to insure certain buildings where the risk of fire was too great, such as all wooden houses. In the United States, regulation of the insurance industry is highly Balkanized, with primary responsibility assumed by individual state insurance departments. Whereas insurance markets have become centralized nationally and internationally, state insurance commissioners operate individually, though at times in concert through a national insurance commissioners' organization. In recent years, some have called for a dual state and federal regulatory system for insurance similar to that which oversees state banks and national banks.

Types of insurance

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 forth below. For example, auto insurance would typically cover both property risk (covering the risk of theft or damage to the car) and liability risk (covering legal claims from causing an accident). A homeowner's insurance policy in the U.S. typically includes property insurance covering damage to the home and the owner's belongings, liability insurance covering certain legal claims against the owner, and even a small amount of health insurance for medical expenses of guests who are injured on the owner's property.

Business insurance can be any kind of insurance that protects businesses against risks. Some principal subtypes of business insurance are (a) the various kinds of professional liability insurance, also called professional indemnity insurance, which are discussed below under that name; and (b) the business owners policy (BOP), which bundles into one policy many of the kinds of coverage that a business owner needs, in a way analogous to how homeowners insurance bundles the coverages that a homeowner needs.^[7]

Health

Main articles: Health insurance and Dental insurance

Almost all developed countries have government-supplied insurance for health

Health insurance policies will often cover the cost of private medical treatments if the National Health Service in the United Kingdom (NHS) or other publicly-funded health programs do not pay for them. It will often result in quicker health care where better facilities are available. Dental insurance, like medical insurance, is coverage for individuals to protect them against dental costs. In the U.S., dental insurance is often part of an employer's benefits package, along with health insurance. Most countries rely on public funding to ensure that all citizens have universal access to health care.

Disability

Disability insurance policies provide financial support in the event the policyholder is unable to work because of disabling illness or injury. It provides monthly support to help pay such obligations as mortgages and credit cards.
Total permanent disability insurance 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.
Disability overhead insurance allows business owners to cover the overhead expenses of their business while they are unable to work.
Workers' compensation insurance replaces all or part of a worker's wages lost and accompanying medical expense incurred because of a job-related injury.

Casualty

Main article: Casualty insurance

Casualty insurance insures against accidents, not necessarily tied to any specific property.

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 will result in a loss.

Life

Main article: Life insurance

Life insurance provides a monetary benefit to a decedent's family or other designated beneficiary, and may specifically provide for income to an insured person's family, burial, funeral and other final expenses. Life insurance policies often allow the option of having the proceeds paid to the beneficiary either in a lump sum cash payment or an annuity.

Annuities provide a stream of payments and are generally classified as insurance because they are issued by insurance companies and regulated as insurance and require the same kinds of actuarial and investment management expertise that life insurance requires. Annuities and 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 U.S. 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 U.S., the tax on interest income on life insurance policies and annuities is generally deferred. However, in some cases the benefit derived from tax deferral may be offset by a low return. This depends upon the insuring company, the type of policy and other variables (mortality, market return, etc.). Moreover, other income tax saving vehicles (e.g., IRAs, 401(k) plans, Roth IRAs) may be better alternatives for value accumulation. A combination of low-cost term life insurance and a higher-return tax-efficient retirement account may achieve better investment return.

Property

Main article: Property insurance

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 includes specialized forms of insurance such as fire insurance, flood insurance, earthquake insurance, home insurance, inland marine insurance or boiler insurance.

Automobile insurance, known in the UK as motor insurance, is probably the most common form of insurance and may cover both legal liability claims against the driver and loss of or damage to the insured's vehicle itself. Throughout the United States auto insurance policy is required to legally operate a motor vehicle on public roads. In some jurisdictions, bodily injury compensation for automobile accident victims has been changed to a no-fault system, which reduces or eliminates the ability to sue for compensation but provides automatic eligibility for benefits. Credit card companies insure against damage on rented cars.

Driving School Insurance insurance provides cover for any authorized driver whilst under going tuition, cover also unlike other motor policies provides cover for instructor liability where both the pupil and driving instructor are both equally liable in the event of a claim.

Aviation insurance insures against hull, spares, deductible, hull wear and liability risks.
Boiler insurance (also known as boiler and machinery insurance or equipment breakdown insurance) insures against accidental physical damage to 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 due to any cause (including the negligence of the insured) not otherwise expressly excluded.
Crop insurance "Farmers use crop insurance to reduce or manage various risks associated with growing crops. Such risks include crop loss or damage caused by weather, hail, drought, frost damage, insects, or disease, for instance."^[8]
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 homeowners insurance policies do not cover earthquake damage. Most earthquake insurance policies feature a high deductible. Rates depend on location and the probability of an earthquake, as well as the construction of the home.
A fidelity bond is a form of casualty insurance that covers policyholders for losses that they incur as a result of fraudulent acts by specified individuals. It usually insures a business for losses caused by the dishonest acts of its employees.
Flood insurance protects against property loss due to flooding. Many insurers in the US do not provide flood insurance in some portions 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 or homeowners insurance: See "Property insurance".
Marine insurance and marine cargo insurance cover the loss or damage of ships at sea or on inland waterways, and of the cargo that may be on them. When the owner of the cargo and the carrier are separate corporations, marine cargo insurance typically compensates the owner of cargo for losses sustained from fire, shipwreck, etc., but excludes losses that can be recovered from the carrier or the carrier's insurance. Many marine insurance underwriters will include "time element" coverage in such policies, which extends the indemnity to cover loss of profit and other business expenses attributable to the delay caused by a covered loss.
Surety bond insurance is a three party insurance guaranteeing the performance of the principal.
Terrorism insurance provides protection against any loss or damage caused by terrorist activities.
Volcano insurance is an insurance that covers volcano damage in Hawaii.
Windstorm insurance is an insurance covering the damage that can be caused by hurricanes and tropical cyclones.

Liability

Main article: Liability insurance

Liability insurance is a very broad superset that covers legal claims against the insured. Many types of insurance include an aspect of liability coverage. For example, a homeowner's insurance policy will normally include liability coverage which protects the insured in the event of a claim brought by someone who slips and falls on the property; automobile insurance also includes an aspect of liability insurance that indemnifies against the harm that a crashing car can cause to others' lives, health, or property. The protection offered by a liability insurance policy is twofold: a legal defense in the event of a lawsuit commenced against the policyholder and indemnification (payment on behalf of the insured) with respect to a settlement or court verdict. Liability policies typically cover only the negligence of the insured, and will not apply to results of willful or intentional acts by the insured.

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: See "Professional liability insurance" under "Liability insurance".
Professional liability insurance, also called professional indemnity insurance, protects professional practitioners such as architects, lawyers, doctors, and accountants against potential negligence claims made by their patients/clients. Professional liability insurance may take on different names depending on the profession. For example, professional liability insurance in reference to the medical profession may be called malpractice insurance. Notaries public may take out errors and omissions insurance (E&O). Other potential E&O policyholders include, for example, real estate brokers, home inspectors, appraisers, and website developers.
Directors and officers liability insurance protects an organization (usually a corporation) from costs associated with litigation resulting from mistakes incurred by directors and officers for which they are liable. In the industry, it is usually called "D&O" for short.
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.

Credit

Main article: Credit insurance

Credit insurance repays some or all of a loan back when certain things happen to the borrower such as unemployment, disability, or death. 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.

Mortgage insurance insures the lender against default by the borrower.

Other types

Collateral protection insurance or CPI, insures property (primarily vehicles) held as collateral for loans made by lending institutions.
Defense Base Act Workers' compensation or DBA Insurance insurance provides coverage for civilian workers hired by the government to perform contracts outside the US and Canada. DBA is required for all US citizens, US residents, US Green Card holders, and all employees or subcontractors hired on overseas government contracts. Depending on the country, Foreign Nationals must also be covered under DBA. This coverage typically includes expenses related to medical treatment and loss of wages, as well as disability and death benefits.
Expatriate insurance provides individuals and organizations operating outside of their home country with protection for automobiles, property, health, liability and business pursuits.
Financial loss insurance protects individuals and companies against various financial risks. For example, a business might purchase cover to protect it from loss of sales if a fire in a factory prevented it from carrying out its business for a time. Insurance might also cover the failure of a creditor to pay money it owes to the insured. This type of insurance is frequently referred to as "business interruption insurance." Fidelity bonds and surety bonds are included in this category, although these products provide a benefit to a third party (the "obligee") in the event the insured party (usually referred to as the "obligor") fails to perform its obligations under a contract with the obligee.
Kidnap and ransom insurance
Locked funds insurance is a little-known hybrid insurance policy jointly issued by governments and banks. It is used to protect public funds from tamper by unauthorized parties. In special cases, a government may authorize its use in protecting semi-private funds which are liable to tamper. The terms of this type of insurance are usually very strict. Therefore it is used only in extreme cases where maximum security of funds is required.
Nuclear incident insurance covers damages resulting from an incident involving radioactive materials and is generally arranged at the national level. (For the United States, see the 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. A first-party coverage for contamination of insured property either by external or on-site sources. Coverage for liability to third parties arising from contamination of air, water, or land due to the sudden and accidental release of hazardous materials from the insured site. The policy usually covers the costs of cleanup and may include coverage for releases from underground storage tanks. Intentional acts are specifically excluded.
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, lost of personal belongings, travel delay, personal liabilities, etc.

Insurance financing vehicles

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.
Fraternal insurance is provided on a cooperative basis by fraternal benefit societies or other social organizations.^[9]
Formal self insurance is the deliberate decision to pay for otherwise insurable losses out of one's own money. This can be done on a formal basis by establishing a separate fund into which funds are deposited on a periodic basis, or by simply forgoing the purchase of available insurance and paying out-of-pocket. Self insurance is usually used to pay for high-frequency, low-severity losses. Such losses, if covered by conventional insurance, mean having to pay a premium that includes loadings for the company's general expenses, cost of putting the policy on the books, acquisition expenses, premium taxes, and contingencies. While this is true for all insurance, for small, frequent losses the transaction costs may exceed the benefit of volatility reduction that insurance otherwise affords.
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.
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 primary used for capital management rather than to transfer insurance risk.
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.
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 mandates participation by all citizens. By forcing everyone in society to be a policyholder and pay premiums, it ensures that everyone can become a claimant when or if he/she needs to. Along the way this inevitably becomes related to other concepts such as the justice system and the welfare state. This is a large, complicated topic that engenders tremendous debate, which can be further studied in the following articles (and others):

Insurance companies

Insurance companies may be classified into two groups:

Life insurance companies, which sell life insurance, annuities and pensions products.
Non-life, General, 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 your "main stream" insurers. These are the companies that typically insure your auto, home or business. They use pattern or "cookie-cutter" policies without variation from one person to the next. They usually have lower premiums than excess lines and can sell directly to individuals. They are regulated by state laws that can restrict the amount they can charge for insurance policies.

Excess line insurance companies (aka Excess and Surplus) typically insure risks not covered by the standard lines market. They are broadly referred as being all insurance placed with non-admitted insurers. Non-admitted insurers are not licensed in the states where the risks are located. These companies have more flexibility and can react faster than standard insurance companies because they are not required to file rates and forms as do the "admitted" carriers do. However, they still have substantial regulatory requirements placed upon them. State laws generally require insurance placed with surplus line agents and brokers to not be available through standard licensed insurers.

Insurance companies are generally classified as either mutual or stock companies. This is more of a traditional distinction as true mutual companies are becoming rare. Mutual companies are owned by the policyholders, while stockholders (who may or may not own policies) own stock insurance companies. Other possible forms for an insurance company include reciprocals, in which policyholders 'reciprocate' in sharing risks, and Lloyds organizations.

Insurance companies are rated by various agencies such as 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 percent subsidiary of the self-insured parent company); of a "mutual" captive (which insures the collective risks of members of an industry); and of an "association" captive (which self-insures individual risks of the members of a professional, commercial or industrial association). Captives represent commercial, economic and tax advantages to their sponsors because of the reductions in costs they help create and for the ease of insurance risk management and the flexibility for cash flows they generate. Additionally, they may provide coverage of risks which is neither available nor offered in the traditional insurance market at reasonable prices.

The types of risk that a captive can underwrite for their parents include property damage, public and products liability, professional indemnity, employee benefits, employers liability, motor and medical aid expenses. The captive's exposure to such risks may be limited by the use of reinsurance.

Captives are becoming an increasingly important component of the risk management and risk financing strategy of their parent. This can be understood against the following background:

heavy and increasing premium costs in almost every line of coverage;
difficulties in insuring certain types of fortuitous risk;
differential coverage standards in various parts of the world;
rating structures which reflect market trends rather than individual loss experience;
insufficient credit for deductibles and/or loss control efforts.

There are also companies known as 'insurance consultants'. Like a mortgage broker, these companies are paid a fee by the customer to shop around for the best insurance policy amongst many companies. Similar to an insurance consultant, an 'insurance broker' also shops around for the best insurance policy amongst many companies. However, with insurance brokers, the fee is usually paid in the form of commission from the insurer that is selected rather than directly from the client.

Neither insurance consultants nor insurance brokers are insurance companies and no risks are transferred to them in insurance transactions. Third party administrators are companies that perform underwriting and sometimes claims handling services for insurance companies. These companies often have special expertise that the insurance companies do not have.

The financial stability and strength of an insurance company should be a major consideration when purchasing an insurance contract. An insurance premium paid currently provides coverage for losses that might arise many years in the future. For that reason, the viability of the insurance carrier is very important. In recent years, a number of insurance companies have become insolvent, leaving their policyholders with no coverage (or coverage only from a government-backed insurance pool or other arrangement with less attractive payouts for losses). A number of independent rating agencies, such as Best's, Fitch, Standard & Poor's, and Moody's Investors Service, provide information and rate the financial viability of insurance companies.

Global insurance industry

Non-life insurance premia written in 2005

Global insurance premiums grew by 8.0% in 2006 (or 5% in real terms) to reach $3.7 trillion due to improved profitability and a benign economic environment characterised by solid economic growth, moderate inflation and strong equity markets. Profitability improved in both life and non-life insurance in 2006 compared to the previous year. Life insurance premiums grew by 10.2% in 2006 as demand for annuity and pension products rose. Non-life insurance premiums grew by 5.0% due to growth in premium rates. Over the past decade, global insurance premiums rose by more than a half as annual growth fluctuated between 2% and 11%.

Advanced economies account for the bulk of global insurance. With premium income of $1,485bn, Europe was the most important region, followed by North America ($1,258bn) and Asia ($801bn). The top four countries accounted for nearly two-thirds of premiums in 2006. The US and Japan alone accounted for 43% of world insurance, much higher than their 7% share of the global population. Emerging markets accounted for over 85% of the world’s population but generated only around 10% of premiums. The volume of UK insurance business totalled $418bn in 2006 or 11.2% of global premiums. ^[10]

Controversies

Insurance insulates too much

By creating a "security blanket" for its insureds, an insurance company may inadvertently find that its insureds may not be as risk-averse as they might otherwise be (since, by definition, the insured has transferred the risk to the insurer). This problem is known to the insurance industry as 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.

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 the insured. Even if a provider were so irrational as to desire to provide such coverage, it is against the public policy of most countries to allow such insurance to exist, and thus it is usually illegal.

Closed community self-insurance

Some communities prefer to create virtual insurance amongst themselves by other means than contractual risk transfer, which assigns explicit numerical values to risk. A number of religious groups, including the Amish and 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.

Complexity of insurance policy contracts

Insurance policies can be complex and some policyholders may not understand all the fees and coverages included in a policy. As a result, people may buy policies on unfavorable terms. In response to these issues, many countries have enacted detailed statutory and regulatory regimes governing every aspect of the insurance business, including minimum standards for policies and the ways in which they may be advertised and sold.

Many institutional insurance purchasers buy insurance through an insurance broker. Brokers represent the buyer (not the insurance company), and typically counsel the buyer on appropriate coverages, policy limitations. A broker generally holds contracts with many insurers, thereby allowing the broker to "shop" the market for the best rates and coverage possible.

Insurance may also be purchased through an agent. Unlike a broker, who represents the policyholder, an agent represents the insurance company from whom the policyholder buys. An agent can represent more than one company.

Redlining

Redlining is the practice of denying insurance coverage in specific geographic areas, purportedly because of a high likelihood of loss, while the alleged motivation is unlawful discrimination. 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.^[11]

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. Thus, "discrimination" against (i.e., differential treatment of) potential insureds in the risk evaluation and premium-setting process is a necessary by-product of the fundamentals of insurance underwriting. For instance, insurers charge older people significantly higher premiums than they charge younger people for term life insurance. Older people are thus treated differently than younger people (i.e., a distinction is made, discrimination occurs). The rationale for the differential treatment goes to the heart of the risk a life insurer takes: Old people are likely to die sooner than young people, so the risk of loss (the insured's death) is greater in any given period of time and therefore the risk premium must be higher to cover the greater risk. However, treating insureds differently when there is no actuarially sound reason for doing so is unlawful discrimination.

What is often missing from the debate is that prohibiting the use of legitimate, actuarially sound factors means that an insufficient amount is being charged for a given risk, and there is thus a deficit in the system. The failure to address the deficit may mean insolvency and hardship for all of a company's insureds. The options for addressing the deficit seem to be the following: Charge the deficit to the other policyholders or charge it to the government (i.e., externalize outside of the company to society at large).

Insurance patents

Further information: Insurance patent

New insurance 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 telematic auto insurance. It was independently invented and patented by a major U.S. auto insurance company, Progressive Auto Insurance (U.S. Patent 5,797,134 ) and a Spanish independent inventor, Salvador Minguijon Perez (EP patent 0700009).

The basic idea of telematic auto insurance is that a driver's behavior is monitored directly while he or she drives and the information is transmitted to the insurance company. The insurance company uses the information to assess the likelihood that a driver will have an accident and adjusts premiums accordingly. A driver who drives great distances at high speeds, for example, might be charged a different rate than a driver who drives short distances at low speeds. The precise effect on charges is not known as it is not clear that a high speed long distance driver incurs greater risk to an insurance pool than the slow around-town driver.^{[citation needed]}

A British auto insurance company, Norwich Union, has obtained a license to both the Progressive patent and Perez patent. They have made investments in infrastructure and developed a commercial offering called "Pay As You Drive" or PAYD.

Recent theoretical economic research on the social welfare effects of Progressive's telematics technology business process patents have questioned whether the business process patents are pareto efficient for society. Preliminary results suggest that they are not, but more work is needed. ^[12] ^[13]

Many independent inventors are in favor of patenting new insurance products since it gives them protection from big companies when they bring their new insurance products to market. Independent inventors account for 70 percent of the new U.S. patent applications in this area.

Many insurance executives are opposed to patenting insurance products because it creates a new risk for them. 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 issued has steadily risen from 15 in 2002 to 44 in 2006. ^[14]

The insurance industry and rent seeking

Certain insurance products and practices have been described as rent seeking by critics. That is, some insurance products or practices are useful primarily because of legal benefits, such as reducing taxes, as opposed to providing protection against risks of adverse events. 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. 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.

Criticism of insurance companies

Some people believe that modern insurance companies are money-making businesses which have little interest in insurance. They argue that the purpose of insurance is to spread risk so the reluctance of insurance companies to take on high-risk cases (e.g. houses in areas subject to flooding, or young drivers) runs counter to the principle of insurance.

Other criticisms include:

Insurance policies contain too many exclusion clauses. For example, some house insurance policies do not cover damage to garden walls.

Many insurance companies now use call centres and staff attempt to answer questions by reading from a script. It is difficult to speak to anybody with expert knowledge.

Glossary

'Combined ratio' = loss ratio + expense ratio. Loss ratio is calculated by dividing the amount of losses (sometimes including loss adjustment expenses) by the amount of earned premium. Expense ratio is calculated by dividing the amount of operational expenses by the amount of earned premium. A lower number indicates a better return on the amount of capital placed at risk by an insurer.
'URIE' = unincorporated reciprocal inter-insurance exchange.
'SSA' = subscriber savings account.
'AIF' = attorney in fact.