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 to another entity, in exchange for a premium. Insurer is the company that sells the insurance. Insurance rate is a factor used in determining the amount, the name of the premium to pay for a certain amount of coverage. Risk management, the practice of the assessment and control of risks, has been developed as a discrete field of study and practice. A large number of exposure homogeneous units. The vast majority of insurance policies are designed for individual members of very large classes. Motor insurance, for example, are about 175 million cars in the United States in 2004. [2] The existence of a large number of homogeneous exposure units allows insurers benefit from the so-called "law of large numbers", which effectively Imagine that if the number of units of exposure increases, the actual results are likely to become increasingly close with the expected results. There are exceptions to this criterion. Lloyd's of London is famous to ensure the life or health of the actors, actresses and sports figures. Satellite Launch insurance covers events that are rare. Large commercial property policies can ensure exceptional properties for which there are no 'homogeneous' exposure units. Despite not on this criterion, many risks, as they are generally considered to be insurable. Definite Loss. The event which gives rise to the loss that is subject to the insurance needs, at least in principle, take place at a time known in a familiar place, and a known cause. The classic example is the death of an insured on a life assurance. Brand, car accidents and injuries to all workers easily meet this criterion. Other types of losses can only be expressed in theory. Occupational disease, for example, may involve prolonged exposure to adverse conditions where no specific time, place or identifiable cause. Ideally, the time, place and cause of a loss must be clear enough that a reasonable person with sufficient information objectively verify all three elements. Accidental loss. The event that triggered part of a claim to be accidental, or at least beyond the control of the beneficiary of the insurance. The loss must be 'clean', in the sense that the outcome of an event, of which only the possibility for the costs. Events that speculative elements, such as ordinary business risks, are generally not insurable. Big defeat. The extent of the damage must be meaningful from the perspective of the insured. Insurance premiums, both the expected cost of the damage, plus the cost of the issuance and administration of policies, the adaptation of the losses, and the supply of capital necessary to reasonably assure that the insurer will be able to pay claims. For small losses of the latter costs can be several times the size of the expected cost of the losses. There is little point in paying those costs, unless the protection has real value to a buyer. Affordable Premium. If the probability of an insured event has been so high, or the costs of the event so large that the resulting premium is large in proportion to the amount of protection offered, it is not likely that someone will buy insurance, even if bidding . Further, as the accounting profession formally recognizes in financial accounting standards, the premium may not be so great that there is not a reasonable probability of a significant loss to the insurer. If there is no risk of loss, the transaction may have in the form of insurance, but not the contents. (See the US Financial Accounting Standards Board standard number 113) Loss Calculable. There are two elements that must be at least estimable, if not computable formally: the probability of loss, and the resulting costs. Probability of loss is generally an empirical exercise, while the cost has more to do with the ability of a reasonable person in possession of a copy of the policy and a proof of loss coupled with a claim made in the course of that policy and a fairly clear Objective evaluation of the extent of the loss of eligibility as a result of the claim. Catastrofaal limited risk of large losses. The risks of vital importance is often aggregation. If the same event could cause losses of many policyholders from the same insurer, the ability of the insurer to indicate that the policy is limited, not by factors around the individual characteristics of a certain insured, but the factors surrounding the sum of all policyholders Sun exposed. Typically, insurers prefer to limit their exposure to a loss of a single case to a certain small portion of their assets in the order of 5 percent. The loss can be aggregated, or an individual policy could produce exceptionally large claims, the capital restriction will limit appetite for insurers an additional policyholders. The classic example is earthquake insurance, with the possibility of an underwriter to issue a new policy depends on the number and size of the policy it has already signed. Wind insurance in hurricane zones, particularly along coast lines, is another example of this phenomenon. In extreme cases, the aggregation may affect the entire industry, because the combined capital of the insurers and reinsurers may be small in comparison with the needs of potential policyholders in areas exposed to risk aggregation. In the commercial fire insurance, it is possible for some properties whose total value is much more exposed than an individual insurer's capital coercion. Such properties are generally distributed among the various insurers, or are insured by a single insurer which syndicates the risk in the reinsurance market. A "compensation" policy will not pay claims until the insured has paid out of their own pockets to some third party, which runs a visitor to your home slips in a word you left wet and sues you for $ 10000 to win. Under an "indemnity" policy of the homeowner should come with the $ 10000 to pay for the visitors, and then would be "compensated" by the insurance carrier for the out of pocket costs ($ 10,000) [4]. An entity seeking to transfer risk (an individual, company or association of any kind, etc.), the "insured" party once risk is based on an 'insurer', the party to ensure, through a contract called an insurance policy. " Normally an insurance contract shall contain at least the following elements: the parties (the insurer, the insured, the beneficiaries), the premium, the period of coverage, the specific loss event covered, the amount of coverage (ie, the Amount to be paid for the insured or beneficiary in the event of a loss), and exclusions (events not covered). A person is thus said to be "compensated" by the loss events in the policy. When insured parties experience a loss of a certain risk, the coverage of the insured right to a "claim" against the insurer for the guaranteed amount of the loss, as specified by the policy. The fee paid by the insured to the insurer for the assumption that the risks are "premium". Insurance premiums of many insureds are used to finance the accounts set aside for later payment of claims-in theory for a relatively few claimants and overhead costs. While an insurer maintains sufficient resources for anticipated losses (ie reserves), the remaining margin is an insurer of the profits. Insurers make money in two ways: (1) by means of taking over, the process by which insurers select the risks and decide how much to insure premiums to charge for accepting those risks and (2) by investing the they collect premiums from policyholders. The most difficult aspect of the insurance business is taking over the policy. Using a wide range of data, the insurers predict that the probability that a claim will be made against their policies and price products. To that end, insurers use actuarial science to quantify the risks they are willing to take the premium costs to be taken. Data will be analyzed to quite accurately project the rate of claims in the future, based on a certain risk. Actuarial science uses statistics and probability to analyze the risks associated with the scope of the dangers, and these scientific principles are used to determine an insurer of the total exposure. Upon termination of a given policy, the amount of premiums collected and investment gains them minus the amount paid out in claims, the insurer profits over that policy. Of course, from the perspective of the insurer, some policies are winners (ie, the insurer pays less in claims and expenses than it received from premiums and investment income), and some are losers (ie, the insurer will pay more in claims and expenses than They receive in premiums and investment income). An insurer over performance is measured in the combined ratio. The loss ratio (incurred losses and loss adjustment expenses divided by net earned premiums) has been added to the cost ratio (underwriting of the costs divided by net premiums written) for the determination of the company combined ratio. The combined ratio is a reflection of the company over the total profitability. A combined ratio of less than 100 percent indicates underwriting of profitability, while slightly more than 100 indicates a loss. Insurance companies also earn investment profits to "float". "Float" of the available reserve is the amount of money at hand at any given moment, that an insurer has collected insurance premiums, but have not been paid in claims. Insurers to invest insurance premiums once they are collected and continue to earn interest on them until claims are paid. In the United States, taking over the loss of property and casualty insurance companies was $ 142.3 billion in the five years ending 2003. But the total profit for the same period was $ 68.4 billion as a result of the float. Some insurance industry insiders, especially Hank Greenberg, do not believe that it is always possible to profit from the adoption of a non-profit float as well, but this opinion is not universally held. Of course, the "float" method is difficult to implement in a period of economic depression. Bear markets do cause insurers to shift investment and toughen their standards. So a bad economy generally means high insurance premiums. This tendency to swing between profitable and unprofitable periods over time is generally known as the "over" or insurance cycle. [6] Property and casualty insurers currently the most money from their auto insurance line of the company. Generally better statistics are available on the auto underwriting losses and on this line of business has greatly benefited from advances in computer science. In addition, property losses in the US due to natural disasters have exacerbated this trend. Finally, claims handling and loss is materialized the usefulness of insurance. In the management of the claims-handling function, insurers try to find a balance between the elements of customer satisfaction, administrative costs and claims handling too many leaks. As part of this balancing act, insurance fraudulent practices are a major business risks that must be managed and overcome. Gambling or gaming is designed in the beginning, so the odds are unaffected by the players' conduct or behaviour and not obliged to risk mitigation practices. But players can be prepared for them and increase their chance of winning in certain games such as poker or blackjack. Unlike gambling, or gaming, the acquisition of certain types of insurance such as fire insurance, policyholders may be obliged to risk reduction measures, such as installing sprinklers and the use of refractory construction materials to reduce the risk of loss to fire. Moreover, after a proven loss, insurers specializes in providing rehabilitation to minimize the total loss. In a sense we can say that the insurance appears simultaneously with the appearance of the human society. We know two types of economies in human society: money economies (with the market, money, financial instruments etc.) and non-cash or natural economies (excluding money markets, financial instruments etc.). The second type is an ancient form than the first. In such an economy and community, we 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 happen with one of the neighbours, the other neighbours should help. Otherwise, neighbours gets no help in the future. This type of insurance has survived to this day in some countries where the modern economy money with its financial instruments is not widespread (eg countries in the territory of the former Soviet Union). As for the insurance in the modern sense (ie, insurance money in a modern economy, which insurance is a part of the financial sector), said the methods of transmission or distribution of the risk has been practiced by Chinese and Babylonian traders so long ago, in the 3rd and 2nd Millennia BC, respectively. Chinese merchants travel treacherous river rapids would redistribute their ships were very much to limit the loss attributable to a single ship to save. The Babylonians developed a system that was included in the famous Code of Hammurabi, c. 1750 BC, and practiced by early Mediterranean sailing merchants. If a trader got a loan to finance his transfer, he would pay the lender an additional sum in exchange for the lender to cancel the guarantee of the loan should the shipment be stolen. Achaemenian monarchs were the first to assure their people and made it official by registering in the process to ensure governmental notary offices. The insurance tradition has been carried out each year in Norouz (beginning of the Iranian New Year), the heads of the various ethnic groups, as well as others willing to participate, presented gifts to the monarch. The main gift was presented at a special awards ceremony. When a gift was valued at more than 10000 Derrik (Achaemenian gold medal) the issue was enrolled in a special bureau. This is beneficial for those who take special gifts. For others, the presents were fairly judged by the confidants of the court. Then the evaluation was registered in special branches. A thousand years later, the residents of Rhodes inventor of the concept of the 'general average ". Merchants whose goods were shipped together would pay a premium evenly distributed would be used for the repayment of a property dealer who had become 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" that served to families and paid funeral of the members of the dead. Guilds in the Middle Ages served a similar purpose. The Talmud deals with various aspects of goods. Before insurance was founded in the late 17th century, "friendly societies" existed in England, where people donated money to an overall sum that can be used for emergencies. Separate insurance (ie, insurance not bundled with loans or other forms of contracts) was invented in Genoa in the 14th century, as if it were insurance pools backed by promises of the landed estates. This new insurance policies allowed insurance to be separated from the investment, a separation of duties that first proved to be effective in marine insurance. Insurance was much more sophisticated in post-Renaissance Europe, and specialized varieties developed. By the end of the seventeenth century, London growing importance as a center for trade increased demand for marine insurance. In the late 1680s, Mr. Edward Lloyd opened a coffee house that was a popular torture of ship owners, merchants, and ships' captains, and thus a reliable source of news delivery. It was the meeting place for political parties who want to insure cargoes and ships, and who are willing to support such enterprises. Today, Lloyd's of London is still the biggest market (note that it is not an insurance company) for marine and other specialized types of insurance, but it does not unlike the more familiar kinds of insurance. Insurance as we know it today, may be followed to the Great Fire of London, which in 1666 devoured 13200 houses. In the aftermath of this disaster, Nicholas Barbon opened an office to insure buildings. In 1680, he England the first fire company, "The Office Fire," to assure brick houses and frame. Benjamin Franklin helped to popularize and make standard practice of insurance, particularly against fire in the form of a perpetual insurance. In 1752, he founded the Philadelphia Contributionship for the Insurance of Houses from Loss by the fire. Franklin the company was the first to contribute to fire. Not only was his company warn against certain fire, but refused to coverage of certain buildings where the risk of fire was too great, like all wooden houses. In the United States, the regulation of the insurance industry is highly Balkanized, with primary responsibility borne by individual state insurance departments. Whereas the insurance markets have become centralized national and international, state insurance commissioners operate individually, but at times in concert through a national insurance commissioners of the organization. In recent years, some have called for a dual state and federal regulation of insurance similar to that which oversees the banks and national banks. In the State of New York, which has unique laws in keeping with its status as a global business center, the former New York Attorney General Eliot Spitzer was in a unique position to deal with major national insurance brokerages. Spitzer alleged that Marsh & McLennan steered business to insurance companies based on the amount of contingent contracts that can be extracted from carriers, rather than basing decisions on whether carriers had the best deals for customers. Several of the largest commercial insurance brokerages have since stopped accepting contingent commissions have adopted and new business models. Any risks that can be quantified as possible can be ensured. Specific types of risks that can lead to claims are known as "hazards". An insurance will detail the dangers are covered by the policy and which are not. Below are (non-exhaustive) list of the many different types of insurance that are out there. A policy may cover risks in one or more of the categories described below. For example, auto insurance would typically both property risk (relating to the risks of theft or damage to the car) and risk liability (including legal claims cause of an accident). A homeowner insurance in the United States, generally, property insurance for damage to the house and the owner of the property, liability for legal claims against the owner, and even a small amount of health insurance for the medical costs of those injured on Property owner. Business insurance can be for any form of insurance that protects companies against risks. Some subtypes of the most important business insurance (a) the various types of professional indemnity insurance, also known as professional indemnity insurance, which are discussed below under that name, and (b) the business owners policy (BOP), which bundles in a lot of policy From the nature of the coverage that a business owner needs, in a manner analogous to how the bundles homeowners insurance coverages that a homeowner needs. [7] Life insurance provides a monetary benefit of a decedent's family or other designated beneficiary, and in particular provide income support an assured the family, funeral, burial and other final expenses. Life insurance policies often allow the option of the proceeds paid to the beneficiary either in a lump sum cash payment or an annuity. Annuities 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 kind of actuarial and investment management expertise life. Annuïteiten and pensions that pay a benefit for life are sometimes seen as insurance against the possibility that a pensioner will outlive his or her financial resources. As such, it is the complement of life and, from one perspective over, are the mirror image of life. Health insurance policies will often cover the cost of private medical treatments such as the National Health Service in the United Kingdom (NHS), or other government-funded health programs do not pay for them. It will often result in a faster healthcare where better facilities are available. Driving School Insurance provides insurance coverage for any authorised driver while going under tuition, coverage also unlike other motor policy covers liability which both the instructor and student driving instructor are both equally liable in the event of a claim. Driving School Insurance provides insurance coverage for any authorised driver while going under tuition, coverage also unlike other motor policy covers liability which both the instructor and student driving instructor are both equally liable in the event of a claim. Builder's risk insurance insures against the risk of physical loss or damage to property during construction. Builder risk insurance is usually written on an "all risks" basis cover damage caused by whatever reason (including the omission of the insured) is not otherwise expressly excluded. Earthquake insurance is a form of property insurance that pays the policyholder in the event of an earthquake causing injury to the house. Most ordinary homeowners insurance policies do not cover earthquake damage. Most earthquake insurance function of a high deductible. Rates depend on the location and the probability of an earthquake, as well as the construction of the house. A fidelity bond is a form of accident insurance that covers policyholders for the losses they suffered as a result of fraudulent acts by certain individuals. It usually assures a company for the losses caused by the unfair acts of its employees. Flood insurance protects against loss of property caused by the floods. Many insurers in the US do not offer flood insurance in some parts of the country. In response, the federal government's National Flood Insurance Program, which serves as the insurer of last resort. Marine insurance and marine cargo cover the loss or damage of ships at sea or inland waterways, and the cargo that may be on them. When the owner of the cargo and carrier are separate companies, marine cargo insurance typically compensates the owner of the cargo for damage from fire, shipwreck, etc., but excludes the losses that can be recovered from the carrier or the insurance carrier . Many marine insurers will include "time element" coverage in the policy, which extends from the damages to cover lost profits and other business expenses due to the delay caused by a covered loss. Aansprakelijkheidsverzekering is a very broad supergroup that covers legal claims against the insured. Many types of insurance are an aspect of the liability. For example, a homeowner insurance liability coverage will normally also protects the insured in the event of a claim by someone who slips and falls on the property; motor vehicle also an aspect of the liability insurance that indemnifies against the damage that can cause a car crashing to others 'life, health or property. The protection provided by a liability insurance policy is twofold: a legal defense in the case of a lawsuit launched against the policyholder and compensation (payment on behalf of the insured) with respect to a settlement or verdict of the court. Liability policies usually only relate to the negligence of the insured, and will not apply to the results of intentional or deliberate acts by the insured. Professional liability insurance, also known as professional indemnity insurance, protects professionals such as architects, lawyers, doctors, accountants and against possible negligence claims made by their patients / clients. Professional liability insurance can be done in several names, depending on the profession. For example, professional indemnity insurance in reference to the medical profession can be called malpractice insurance. Notaries public may take, errors and omissions insurance (E & O). Other potential E & O policyholders, for example, the real estate brokers, home inspectors, appraisers, and Web site developers. Kredietverzekering pay 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, credit insurance, although the name often used to refer to the policy that relates to other forms of debt. Defense Base Act Workers' compensation or DBA Insurance provides insurance coverage for civilian employees hired by the government to perform tasks outside the United States and Canada. DBA is required for all citizens of the USA, American residents, US Green Card holders, and all employees or subcontractors hired on overseas government contracts. Depending on the country, foreign nationals must also be dealt with within the framework of DBA. This coverage typically covers the cost of medical treatment and lost wages, as well as disability and death benefits. Financial loss insurance protects individuals and businesses against various financial risks. For example, a company can buy coverage to protect against loss of sales as a fire in a plant for the prevention of the execution of his company for a certain period of time. Insurance may also relate to the failure of a creditor to pay money owed to the insured. This type of insurance is often referred to as "business interruption insurance." Fidelity bonds and surety bonds are included in this category, although these products offer an advantage to third party (the "obligee) in the event the insured party (usually referred to as the" debtor ") is not disclosed to its obligations under the execution of a contract with the obligee. Purchase insurance is aimed at providing protection to the products people buy. Purchase insurance to cover individual purchase protection, guarantees, warranties, care plans and even mobile phone insurance. Such insurance is usually very limited in the scope of problems that are covered by the policy. Titel verzekering biedt een garantie dat de titel naar de echte eigendom berust bij de koper en / of mortgagee en zijn vrijgesteld van de pandrechten of lasten. Het is meestal uitgegeven in combinatie met een zoektocht naar de openbare registers uitgevoerd op het tijdstip van een onroerend goed transactie. Beschermde Self-Verzekeringen is een alternatief risico financieringsmechanisme waarin een organisatie behoudt zich het mathematisch berekende kosten van de risico's binnen de organisatie en brengt de katastrofisch risico met specifieke en totale grenzen aan een verzekeraar, zodat de maximale totale kosten van het programma bekend is. Een goed ontworpen en ondertekend Beschermde Self-Insurance Program vermindert en stabiliseert de kosten van verzekering en geeft waardevolle informatie over het beheer van risico's. Terugwerkende kracht Rated Verzekeringen is een methode tot vaststelling van een premie op grote commerciële rekeningen. De definitieve premie is gebaseerd op de verzekerde de werkelijke verlies ervaring in het beleid termijn, soms met een minimum en maximum premie, met de definitieve premie wordt bepaald door een formule. Volgens dit plan, het lopende jaar de premie gebaseerd is gedeeltelijk (of geheel) over het lopende jaar de verliezen, hoewel de premie aanpassingen kan maanden of jaren na het lopende jaar de vervaldatum. De rating formule wordt gewaarborgd in het verzekeringscontract. Formule: retrospectieve premie = omgerekend verlies + basispremie × belasting multiplicatoreffect. Tal van variaties van deze formule zijn ontwikkeld en in gebruik zijn. Formele self verzekering is de weloverwogen beslissing te betalen voor verzekerbare anders verliezen van het eigen geld. Dit kan gebeuren op basis van een formele oprichting van een apart fonds in die fondsen worden gedeponeerd op een periodieke basis, of door gewoon afzien van de aankoop van de beschikbare verzekering en de betaling van out-of-pocket. Self verzekering wordt meestal gebruikt om te betalen voor een hoge frequentie, lage ernst verliezen. Dergelijke verliezen, als die door conventionele verzekering, betekenen tot het betalen van een premie die voor belastingen van het bedrijf algemene kosten, kosten van de aanleg van het beleid op het gebied van de boeken, acquisitie kosten, premie belastingen en uitgaven. Hoewel dit geldt voor alle verzekeringen, voor kleine, vaak verliezen de transactiekosten kunnen hoger zijn dan de baten van de vermindering van de volatiliteit verzekering dat anders liggen. In de meeste landen, leven en niet-leven verzekeraars onderworpen zijn aan verschillende regelingen en verschillende fiscale en boekhoudkundige regels. De belangrijkste reden voor het onderscheid tussen de twee soorten van het bedrijf is dat het leven, lijfrente en pensioen bedrijf is op zeer lange termijn in de natuur - dekking voor levensverzekering of een pensioen kunnen dekken risico's gedurende vele decennia. By contrast, niet-levensverzekeringen dekking meestal betrekking op een kortere termijn, zoals een jaar. In de Verenigde Staten, standaard lijn verzekeringsmaatschappijen zijn uw "main stream" verzekeraars. Dat zijn de bedrijven die typisch verzekeren van uw auto, huis of bedrijf. Zij maken gebruik van patroon of "cookie-cutter" beleid zonder variatie van het ene persoon naar de volgende. Ze hebben meestal lagere premies dan teveel lijnen en rechtstreeks kunnen verkopen aan particulieren. Zij worden geregeld door de wetten die kan beperken van het bedrag kunnen ze kosteloos voor verzekeringspolissen. Excess lijn verzekeringsmaatschappijen (aka Excess en Surplus) typisch verzekeren risico's die niet onder de standaard lijnen markt. Ze zijn over het algemeen bedoeld als alle verzekeringen die met de niet-toegelaten verzekeraars. Niet-toegelaten verzekeraars geen licentie in de landen waar de risico's liggen. Deze bedrijven hebben meer flexibiliteit en kan reageren sneller dan de standaard verzekering bedrijven omdat zij niet nodig zijn om bestand tarieven en vormen als de "toegelaten" vervoerders doen. Echter, ze hebben nog steeds aanzienlijke regelgevende eisen die op hen. Staat wetten algemeen vereisen verzekeringen geplaatst met een overschot lijn agenten en brokers niet beschikbaar via de standaard licentie verzekeraars. Verzekeringen bedrijven zijn over het algemeen ingedeeld als hetzij wederzijdse voorraad of bedrijven. Dit is meer een traditionele onderscheid als echte onderlinge vennootschappen worden schaars. Wederzijdse ondernemingen zijn eigendom van de polishouders, terwijl de aandeelhouders (die al dan niet mogen eigen beleid) eigen voorraad verzekeringsmaatschappijen. Other possible forms for an insurance company include reciprocals, in which policyholders 'reciprocate' in sharing risks, and Lloyds organizations. 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. 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. 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. 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. In recent years this kind of operational definition proved inadequate as a result of contracts that had the form but not the substance of insurance. The essence of insurance is the transfer of risk from the insured to one or more insurers. How much risk a contract actually transfers proved to be at the heart of the controversy. This issue arose most clearly in reinsurance, where the use of Financial Reinsurance to reengineer insurer balance sheets under US GAAP became fashionable during the 1980s. The accounting profession raised serious concerns about the use of reinsurance in which little if any actual risk was transferred, and went on to address the issue in FAS 113, cited above. While on its face, FAS 113 is limited to accounting for reinsurance transactions, the guidance it contains is generally conceded to be equally applicable to US GAAP accounting for insurance transactions executed by commercial enterprises. Paragraph 10 of FAS 113 makes clear that the 9a and 9b tests are based on comparing the present value of all costs to the PV of all income streams. FAS gives no guidance on the choice of a discount rate on which to base such a calculation, other than to say that all outcomes tested should use the same rate. Statement of Statutory Accounting Principles ("SSAP") 62, issued by the National Association of Insurance Commissioners, applies to so-called 'statutory accounting' - the accounting for insurance enterprises to conform with regulation. Paragraph 12 of SSAP 62 is nearly identical to the FAS 113 test, while paragraph 14, which is otherwise very similar to paragraph 10 of FAS 113, additionally contains a justification for the use of a single fixed rate for discounting purposes. The choice of an "reasonable and appropriate" discount rate is left as a matter of judgment. Neither FAS 113 nor SAP 62 defines the terms reasonable or significant. Ideally, one would like to be able to substitute values for both terms. It would be much simpler if one could apply a test of an X percent chance of a loss of Y percent or greater. Such tests have been proposed, including one famously attributed to an SEC official who is said to have opined in an after lunch talk that a 10 percent chance of a 10 percent loss was sufficient to establish both reasonableness and significance. Indeed, many insurers and reinsurers still apply this 10/10" test as a benchmark for risk transfer testing. It should be obvious that an attempt to use any numerical rule such as the 10/10 test will quickly run into problems. Implicit in the test is keeping the 10/10 that either are upper bonds for the comment made by the SEC official therefore, the rest of this paragraph doesn't apply. Suppose a contract has a 1 percent chance of a 10000 percent loss? It should be reasonably self-evident that such a contract is insurance, but it fails one half of the 10/10 test. Excess of loss contracts, like those commonly used for umbrella and general liability insurance, or to insure against property losses, will typically have a low ratio of premium paid to maximum loss recoverable. This ratio (expressed as a percentage), commonly called the rate on line for historical reasons related to underwriting practices at Lloyd's of London, will typically be low for contracts that contain reasonably self-evident risk transfer . As the ratio increases to approximate the present value of the limit of coverage, self-evidence decreases and disappears. The analysis of reasonableness and significance is an estimate of the probability of different gain or loss outcomes under different loss scenarios. It takes time and resources to perform the analysis, which constitutes a burden without value where risk transfer is reasonably self-evident. An insurance policy should not contain provisions that allow one side or the other to unilaterally void the contract in exchange for benefit. Provisions that void the contract for failure to perform or for fraud or material misrepresentation are ordinary and acceptable. The policy should have a term of not more than about three years. This is not a hard and fast rule. Contracts of over five years duration are classified as ‘long- term,’ which can impact the accounting treatment, and can obviously introduce the possibility that over the entire term of the contract, no actual risk will transfer. The coverage provided by the contract need not cease at the end of the term (eg, the contract can cover occurrences as opposed to claims made or claims paid). The contract should be considered to include any other agreements, written or oral, that confer rights, create obligations, or create benefits on the part of either or both parties. Ideally, the contract should contain an ‘Entire Agreement’ clause that assures there are no undisclosed written or oral side agreements that confer rights, create obligations, or create benefits on the part of either or both parties. If such rights, obligations or benefits exist, they must be factored into the tests of reasonableness and significance. Provisions for additional or return premium do not, in and of themselves, render a contract something other than insurance. However, it should be unlikely that either a return or additional premium provision be triggered, and neither party should have discretion regarding the timing of such triggering. All of the events that would give rise to claims under the contract cannot have materialized prior to the inception of the contract. If this "all events" test is not met, then the contract is considered to be a retroactive contract, for which the accounting treatment becomes complex. 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. Some communities prefer to create virtual insurance amongst themselves by other means than contractual risk transfer, which assigns explicit numerical values to risk. A number of religious groups, including the Amish and some Muslim groups, depend on support provided by their communities when disasters strike. The risk presented by any given person is assumed collectively by the community who all bear the cost of rebuilding lost property and supporting people whose needs are suddenly greater after a loss of some kind. In supportive communities where others can be trusted to follow community leaders, this tacit form of insurance can work. In this manner the community can even out the extreme differences in insurability that exist among its members. Some further justification is also provided by invoking the moral hazard of explicit insurance contracts. In the United Kingdom The Crown (which, for practical purposes, meant the Civil service) did not insure property such as government buildings. If a government building was damaged, the cost of repair would be met from public funds because, in the long run, this was cheaper than paying insurance premiums. Since many UK government buildings have been sold to property companies, and rented back, this arrangement is now less common and may have disappeared altogether. Insurance 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. 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.[10 ] 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 (ie, 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 (ie, 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 (ie, externalize outside of the company to society at large). Health insurance, which is coverage for individuals to protect them against medical costs, is a highly charged and political issue in the United States, which does not have socialized health coverage. In theory, the market for health insurance should function in a manner similar to other insurance coverages, but the skyrocketing cost of health coverage has disrupted markets around the globe, but perhaps most glaringly in the US See health insurance & Health insurance in the United States . 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. 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. '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.
No comments:
Post a Comment