Insurance

Insurance is a means of protection from financial

loss in which, in exchange for a fee, a party agrees
to compensate another party in the event of a
certain loss, damage, or injury. It is a form of risk
management, primarily used to protect against the
risk of a contingent or uncertain loss.

An entity which provides insurance is known as

an insurer, insurance company, insurance
carrier, or underwriter. A person or entity who
buys insurance is known as a policyholder, while
a person or entity covered under the policy is
called an insured. The insurance transaction An advertisement for a fire insurance company Norwich
involves the policyholder assuming a guaranteed, Union, showing the amount of assets in coverage and
known, and relatively small loss in the form of a paid insurance (1910)
payment to the insurer (a premium) in exchange
for the insurer's promise to compensate the insured
in the event of a covered loss. The loss may or may not be financial, but it must be reducible to financial
terms. Furthermore, it usually involves something in which the insured has an insurable interest established
by ownership, possession, or pre-existing relationship.

The insured receives a contract, called the insurance policy, which details the conditions and circumstances
under which the insurer will compensate the insured, or their designated beneficiary or assignee. The
amount of money charged by the insurer to the policyholder for the coverage set forth in the insurance
policy is called the premium. If the insured experiences a loss which is potentially covered by the insurance
policy, the insured submits a claim to the insurer for processing by a claims adjuster. A mandatory out-of-
pocket expense required by an insurance policy before an insurer will pay a claim is called a deductible (or
if required by a health insurance policy, a copayment). The insurer may hedge its own risk by taking out
reinsurance, whereby another insurance company agrees to carry some of the risks, especially if the primary
insurer deems the risk too large for it to carry.

History

Early methods
Methods for transferring or distributing risk were practiced by Chinese and Indian traders as long ago as the
3rd and 2nd millennia BC, respectively.[1][2] Chinese merchants travelling treacherous river rapids would
redistribute their wares across many vessels to limit the loss due to any single vessel capsizing.
Codex Hammurabi Law 238 (c. 1755–1750 BC) stipulated that a
sea captain, ship-manager, or ship charterer that saved a ship from
total loss was only required to pay one-half the value of the ship to
the ship-owner.[3][4][5] In the Digesta seu Pandectae (533), the
second volume of the codification of laws ordered by Justinian I
(527–565), a legal opinion written by the Roman jurist Paulus in
235 AD was included about the Lex Rhodia ("Rhodian law"). It
articulates the general average principle of marine insurance Merchants have sought methods to
established on the island of Rhodes in approximately 1000 to 800 minimize risks since early times.
BC, plausibly by the Phoenicians during the proposed Dorian Pictured, Governors of the Wine
Merchant's Guild by Ferdinand Bol,
invasion and emergence of the purported Sea Peoples during the
c. 1680.
Greek Dark Ages (c. 1100–c. 750).[6][7][8]

The law of general average is the fundamental principle that underlies all insurance.[7] In 1816, an
archeological excavation in Minya, Egypt produced a Nerva–Antonine dynasty-era tablet from the ruins of
the Temple of Antinous in Antinoöpolis, Aegyptus. The tablet prescribed the rules and membership dues of
a burial society collegium established in Lanuvium, Italia in approximately 133 AD during the reign of
Hadrian (117–138) of the Roman Empire.[7] In 1851 AD, future U.S. Supreme Court Associate Justice
Joseph P. Bradley (1870–1892 AD), once employed as an actuary for the Mutual Benefit Life Insurance
Company, submitted an article to the Journal of the Institute of Actuaries. His article detailed an historical
account of a Severan dynasty-era life table compiled by the Roman jurist Ulpian in approximately 220 AD
that was also included in the Digesta.[9]

Concepts of insurance has been also found in 3rd century BC Hindu scriptures such as Dharmasastra,
Arthashastra and Manusmriti.[10] The ancient Greeks had marine loans. Money was advanced on a ship or
cargo, to be repaid with large interest if the voyage prospers. However, the money would not be repaid at
all if the ship were lost, thus making the rate of interest high enough to pay for not only for the use of the
capital but also for the risk of losing it (fully described by Demosthenes). Loans of this character have ever
since been common in maritime lands under the name of bottomry and respondentia bonds.[11]

The direct insurance of sea-risks for a premium paid independently of loans began in Belgium about 1300
AD.[11]

Separate insurance contracts (i.e., insurance policies not bundled with loans or other kinds of contracts)
were invented in Genoa in the 14th century, as were insurance pools backed by pledges of landed estates.
The first known insurance contract dates from Genoa in 1347. In the next century, maritime insurance
developed widely, and premiums were varied with risks.[12] These new insurance contracts allowed
insurance to be separated from investment, a separation of roles that first proved useful in marine insurance.

The earliest known policy of life insurance was made in the Royal Exchange, London, on the 18th of June
1583, for £383, 6s. 8d. for twelve months on the life of William Gibbons.[11]

Modern methods
Insurance became far more sophisticated in Enlightenment-era Europe, where specialized varieties
developed.
Property insurance as we know it today can be traced to the Great Fire of
London, which in 1666 devoured more than 13,000 houses. The
devastating effects of the fire converted the development of insurance
"from a matter of convenience into one of urgency, a change of opinion
reflected in Sir Christopher Wren's inclusion of a site for "the Insurance
Office" in his new plan for London in 1667."[13] A number of attempted
fire insurance schemes came to nothing, but in 1681, economist Nicholas
Barbon and eleven associates established the first fire insurance company,
the "Insurance Office for Houses", at the back of the Royal Exchange to
insure brick and frame homes. Initially, 5,000 homes were insured by his
Insurance Office.[14]
Lloyd's Coffee House was the
first organized market for
At the same time, the first insurance schemes for the underwriting of
marine insurance.
business ventures became available. By the end of the seventeenth
century, London's growth as a centre for trade was increasing due to the
demand for marine insurance. In the late 1680s, Edward Lloyd opened a coffee house, which became the
meeting place for parties in the shipping industry wishing to insure cargoes and ships, including those
willing to underwrite such ventures. These informal beginnings led to the establishment of the insurance
market Lloyd's of London and several related shipping and insurance businesses.[15]

Life insurance policies were taken out in the early 18th century. The
first company to offer life insurance was the Amicable Society for a
Perpetual Assurance Office, founded in London in 1706 by William
Talbot and Sir Thomas Allen.[16][17] Upon the same principle, Edward
Rowe Mores established the Society for Equitable Assurances on
Lives and Survivorship in 1762.

It was the world's first mutual insurer and it pioneered age based
premiums based on mortality rate laying "the framework for scientific
insurance practice and development" and "the basis of modern life
assurance upon which all life assurance schemes were subsequently
based."[18]

In the late 19th century "accident insurance" began to become

available.[19] The first company to offer accident insurance was the Leaflet promoting the National
Railway Passengers Assurance Company, formed in 1848 in England Insurance Act 1911

to insure against the rising number of fatalities on the nascent railway

system.

The first international insurance rule was the York Antwerp Rules (YAR) for the distribution of costs
between ship and cargo in the event of general average. In 1873 the "Association for the Reform and
Codification of the Law of Nations", the forerunner of the International Law Association (ILA), was
founded in Brussels. It published the first YAR in 1890, before switching to the present title of the
"International Law Association" in 1895.[20][21]

By the late 19th century governments began to initiate national insurance programs against sickness and old
age. Germany built on a tradition of welfare programs in Prussia and Saxony that began as early as in the
1840s. In the 1880s Chancellor Otto von Bismarck introduced old age pensions, accident insurance and
medical care that formed the basis for Germany's welfare state.[22][23] In Britain more extensive legislation
was introduced by the Liberal government in the National Insurance Act 1911. This gave the British
working classes the first contributory system of insurance against illness and unemployment.[24] This
system was greatly expanded after the Second World War under the influence of the Beveridge Report, to
form the first modern welfare state.[22][25]

In 2008, the International Network of Insurance Associations (INIA), then an informal network, became
active and it has been succeeded by the Global Federation of Insurance Associations (GFIA), which was
formally founded in 2012 to aim to increase insurance industry effectiveness in providing input to
international regulatory bodies and to contribute more effectively to the international dialogue on issues of
common interest. It consists of its 40 member associations and 1 observer association in 67 countries, which
companies account for around 89% of total insurance premiums worldwide.[26]

Principles
Insurance involves pooling funds from many insured entities (known as exposures) to pay for the losses that
only some insureds may incur. The insured entities are therefore protected from risk for a fee, with the fee
being dependent upon the frequency and severity of the event occurring. In order to be an insurable risk, the
risk insured against must meet certain characteristics. Insurance as a financial intermediary is a commercial
enterprise and a major part of the financial services industry, but individual entities can also self-insure
through saving money for possible future losses.[27]

Insurability
Risk which can be insured by private companies typically share seven common characteristics:[28]

1. A large number of similar exposure units: Since insurance operates through pooling
resources, the majority of insurance policies cover individual members of large classes,
allowing insurers to benefit from the law of large numbers in which predicted losses are
similar to the actual losses. Exceptions include Lloyd's of London, which is famous for
insuring the life or health of actors, sports figures, and other famous individuals. However, all
exposures will have distinct differences, which may lead to different premium rates.
2. Definite loss: This type of loss takes place at a known time and place from a known cause.
The classic example involves the death of an insured person on a life insurance policy. Fire,
automobile accidents, and worker injuries may all easily meet this criterion. Other types of
losses may only be definite in theory. Occupational disease, for instance, may involve
prolonged exposure to injurious conditions where no specific time, place, or cause is
identifiable. Ideally, the time, place, and cause of a loss should be clear enough that a
reasonable person, with sufficient information, could objectively verify all three elements.
3. Accidental loss: The event that constitutes the trigger of a claim should be fortuitous, or at
least outside the control of the beneficiary of the insurance. The loss should be pure
because it results from an event for which there is only the opportunity for cost. Events that
contain speculative elements such as ordinary business risks or even purchasing a lottery
ticket are generally not considered insurable.
4. Large loss: The size of the loss must be meaningful from the perspective of the insured.
Insurance premiums need to cover both the expected cost of losses, plus the cost of issuing
and administering the policy, adjusting losses, and supplying the capital needed to
reasonably assure that the insurer will be able to pay claims. For small losses, these latter
costs may be several times the size of the expected cost of losses. There is hardly any point
in paying such costs unless the protection offered has real value to a buyer.
 5. Affordable premium: If the likelihood of an insured event is so high, or the cost of the event so
large, that the resulting premium is large relative to the amount of protection offered, then it is
not likely that insurance will be purchased, even if on offer. Furthermore, as the accounting
profession formally recognizes in financial accounting standards, the premium cannot be so
large that there is not a reasonable chance of a significant loss to the insurer. Suppose there
is no such chance of loss. In that case, the transaction may have the form of insurance, but
not the substance (see the U.S. Financial Accounting Standards Board pronouncement
number 113: "Accounting and Reporting for Reinsurance of Short-Duration and Long-
Duration Contracts").
6. Calculable loss: There are two elements that must be at least estimable, if not formally
calculable: the probability of loss and the attendant cost. Probability of loss is generally an
empirical exercise, while cost has more to do with the ability of a reasonable person in
possession of a copy of the insurance policy and a proof of loss associated with a claim
presented under that policy to make a reasonably definite and objective evaluation of the
amount of the loss recoverable as a result of the claim.
7. Limited risk of catastrophically large losses: Insurable losses are ideally independent and
non-catastrophic, meaning that the losses do not happen all at once and that individual
losses are not severe enough to bankrupt the insurer; insurers may prefer to limit their
exposure to a loss from a single event to some small portion of their capital base. Capital
constrains insurers' ability to sell earthquake insurance as well as wind insurance in
hurricane zones. In the United States, the federal government insures flood risk in
specifically identified areas. 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 which syndicates the risk into the reinsurance market.

Legal
When a company insures an individual entity, there are basic legal requirements and regulations. Several
commonly cited legal principles of insurance include:[29]

1. Indemnity – the insurance company indemnifies or compensates the insured in the case of
certain losses only up to the insured's interest.
2. Benefit insurance – as it is stated in the study books of The Chartered Insurance Institute, the
insurance company does not have the right of recovery from the party who caused the injury
and must compensate the Insured regardless of the fact that Insured had already sued the
negligent party for the damages (for example, personal accident insurance)
3. Insurable interest – the insured typically must directly suffer from the loss. Insurable interest
must exist whether property insurance or insurance on a person is involved. The concept
requires that the insured have a "stake" in the loss or damage to the life or property insured.
What that "stake" is will be determined by the kind of insurance involved and the nature of
the property ownership or relationship between the persons. The requirement of an insurable
interest is what distinguishes insurance from gambling.
4. Utmost good faith – (Uberrima fides) the insured and the insurer are bound by a good faith
bond of honesty and fairness. Material facts must be disclosed.
5. Contribution – insurers, which have similar obligations to the insured, contribute in the
indemnification, according to some method.
6. Subrogation – the insurance company acquires legal rights to pursue recoveries on behalf of
the insured; for example, the insurer may sue those liable for the insured's loss. The Insurers
can waive their subrogation rights by using the special clauses.
7. Causa proxima, or proximate cause – the cause of loss (the peril) must be covered under the
insuring agreement of the policy, and the dominant cause must not be excluded
 8. Mitigation – In case of any loss or casualty, the asset owner must attempt to keep loss to a
minimum, as if the asset was not insured.

Indemnification
To "indemnify" means to make whole again, or to be reinstated to the position that one was in, to the extent
possible, prior to the happening of a specified event or peril. Accordingly, life insurance is generally not
considered to be indemnity insurance, but rather "contingent" insurance (i.e., a claim arises on the
occurrence of a specified event). There are generally three types of insurance contracts that seek to
indemnify an insured:

1. A "reimbursement" policy
2. A "pay on behalf" or "on behalf of policy"[30]
3. An "indemnification" policy
From an insured's standpoint, the result is usually the same: the insurer pays the loss and claims expenses.

If the Insured has a "reimbursement" policy, the insured can be required to pay for a loss and then be
"reimbursed" by the insurance carrier for the loss and out of pocket costs including, with the permission of
the insurer, claim expenses.[30][note 1]

Under a "pay on behalf" policy, the insurance carrier would defend and pay a claim on behalf of the insured
who would not be out of pocket for anything. Most modern liability insurance is written on the basis of
"pay on behalf" language, which enables the insurance carrier to manage and control the claim.

Under an "indemnification" policy, the insurance carrier can generally either "reimburse" or "pay on behalf
of", whichever is more beneficial to it and the insured in the claim handling process.

An entity seeking to transfer risk (an individual, corporation, or association of any type, etc.) becomes the
"insured" party once risk is assumed by an "insurer", the insuring party, by means of a contract, called an
insurance policy. Generally, an insurance contract includes, at a minimum, the following elements:
identification of participating parties (the insurer, the insured, the beneficiaries), the premium, the period of
coverage, the particular loss event covered, the amount of coverage (i.e., the amount to be paid to the
insured or beneficiary in the event of a loss), and exclusions (events not covered). An insured is thus said to
be "indemnified" against the loss covered in the policy.

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

Exclusions
Policies typically include a number of exclusions, for example:

Nuclear exclusion clause, excluding damage caused by nuclear and radiation accidents
War exclusion clause, excluding damage from acts of war or terrorism.[31][32]
Insurers may prohibit certain activities which are considered dangerous and therefore excluded from
coverage. One system for classifying activities according to whether they are authorised by insurers refers to
"green light" approved activities and events, "yellow light" activities and events which require insurer
consultation and/or waivers of liability, and "red light" activities and events which are prohibited and
outside the scope of insurance cover.[33]

Social effects
Insurance can have various effects on society through the way that it changes who bears the cost of losses
and damage. On one hand it can increase fraud; on the other it can help societies and individuals prepare for
catastrophes and mitigate the effects of catastrophes on both households and societies.

Insurance can influence the probability of losses through moral hazard, insurance fraud, and preventive
steps by the insurance company. Insurance scholars have typically used moral hazard to refer to the
increased loss due to unintentional carelessness and insurance fraud to refer to increased risk due to
intentional carelessness or indifference.[34] Insurers attempt to address carelessness through inspections,
policy provisions requiring certain types of maintenance, and possible discounts for loss mitigation efforts.
While in theory insurers could encourage investment in loss reduction, some commentators have argued that
in practice insurers had historically not aggressively pursued loss control measures—particularly to prevent
disaster losses such as hurricanes—because of concerns over rate reductions and legal battles. However,
since about 1996 insurers have begun to take a more active role in loss mitigation, such as through building
codes.[35]

Methods of insurance
According to the study books of The Chartered Insurance Institute, there are variant methods of insurance
as follows:

1. Co-insurance – risks shared between insurers (sometimes referred to as "Retention")

2. Dual insurance – having two or more policies with overlapping coverage of a risk (both the
individual policies would not pay separately – under a concept named contribution, they
would contribute together to make up the policyholder's losses. However, in case of
contingency insurances such as life insurance, dual payment is allowed)
3. Self-insurance – situations where risk is not transferred to insurance companies and solely
retained by the entities or individuals themselves
4. Reinsurance – situations when the insurer passes some part of or all risks to another Insurer,
called the reinsurer

Insurers' business model

Insurers may use the subscription business model, collecting premium payments periodically in return for
on-going and/or compounding benefits offered to policyholders.

Underwriting and investing

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

Insurers make money in two ways:

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 taking
Accidents will happen (William H.
the brunt of the risk should it come to fruition.
Watson, 1922) is a slapstick silent
By investing the premiums they collect from insured
film about the methods and mishaps
parties
of an insurance broker. Collection
The most complicated aspect of insuring is the actuarial science of EYE Film Institute Netherlands.
ratemaking (price-setting) of policies, which uses statistics and
probability to approximate the rate of future claims based on a given
risk. After producing rates, the insurer will use discretion to reject or accept risks through the underwriting
process.

At the most basic level, initial rate-making involves looking at the frequency and severity of insured perils
and the expected average payout resulting from these perils. Thereafter an insurance company will collect
historical loss-data, bring the loss data to present value, and compare these prior losses to the premium
collected in order to assess rate adequacy.[36] Loss ratios and expense loads are also used. Rating for
different risk characteristics involves—at the most basic level—comparing the losses with "loss
relativities"—a policy with twice as many losses would, therefore, be charged twice as much. More
complex multivariate analyses are sometimes used when multiple characteristics are involved and a
univariate analysis could produce confounded results. Other statistical methods may be used in assessing the
probability of future losses.

Upon termination of a given policy, the amount of premium collected minus the amount paid out in claims
is the insurer's underwriting profit on that policy. Underwriting performance is measured by something
called the "combined ratio", which is the ratio of expenses/losses to premiums.[37] A combined ratio of less
than 100% indicates an underwriting profit, while anything over 100 indicates an underwriting loss. A
company with a combined ratio over 100% may nevertheless remain profitable due to investment earnings.

Insurance companies earn investment profits on "float". Float, or available reserve, is the amount of money
on hand at any given moment that an insurer has collected in insurance premiums but has not paid out in
claims. Insurers start investing insurance premiums as soon as they are collected and continue to earn
interest or other income on them until claims are paid out. The Association of British Insurers (grouping
together 400 insurance companies and 94% of UK insurance services) has almost 20% of the investments in
the London Stock Exchange.[38] In 2007, U.S. industry profits from float totaled $58 billion. In a 2009
letter to investors, Warren Buffett wrote, "we were paid $2.8 billion to hold our float in 2008".[39]

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 possible to sustain
a profit from float forever without an underwriting profit as well, but this opinion is not universally held.
Reliance on float for profit has led some industry experts to call insurance companies "investment
companies that raise the money for their investments by selling insurance".[40]
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.[41]

Claims
Claims and loss handling is the materialized utility of insurance; it is the actual "product" paid for. Claims
may be filed by insureds directly with the insurer or through brokers or agents. The insurer may require that
the claim be filed on its own proprietary forms, or may accept claims on a standard industry form, such as
those produced by ACORD.

Insurance-company claims departments employ a large number of claims adjusters, supported by a staff of
records management and data entry clerks. Incoming claims are classified based on severity and are
assigned to adjusters, whose settlement authority varies with their knowledge and experience. An adjuster
undertakes an investigation of each claim, usually in close cooperation with the insured, determines if
coverage is available under the terms of the insurance contract (and if so, the reasonable monetary value of
the claim), and authorizes payment.

Policyholders may hire their own public adjusters to negotiate settlements with the insurance company on
their behalf. For policies that are complicated, where claims may be complex, the insured may take out a
separate insurance-policy add-on, called loss-recovery insurance, which covers the cost of a public adjuster
in the case of a claim.

Adjusting liability-insurance claims is particularly difficult because they involve a third party, the plaintiff,
who is under no contractual obligation to cooperate with the insurer and may in fact regard the insurer as a
deep pocket. The adjuster must obtain legal counsel for the insured—either inside ("house") counsel or
outside ("panel") counsel, monitor litigation that may take years to complete, and appear in person or over
the telephone with settlement authority at a mandatory settlement-conference when requested by a judge.

If a claims adjuster suspects under-insurance, the condition of average may come into play to limit the
insurance company's exposure.

In managing the claims-handling function, insurers seek to balance the elements of customer satisfaction,
administrative handling expenses, and claims overpayment leakages. In addition to this balancing act,
fraudulent insurance practices are a major business risk that insurers must manage and overcome. Disputes
between insurers and insureds over the validity of claims or claims-handling practices occasionally escalate
into litigation (see insurance bad faith).

Marketing
Insurers will often use insurance agents to initially market or underwrite their customers. Agents can be
captive, meaning they write only for one company, or independent, meaning that they can issue policies
from several companies. The existence and success of companies using insurance agents is likely due to the
availability of improved and personalised services. Companies also use Broking firms, Banks and other
corporate entities (like Self Help Groups, Microfinance Institutions, NGOs, etc.) to market their
products.[42]

Types
Any risk that can be quantified can potentially be insured. Specific kinds of risk that may give rise to claims
are known as perils. An insurance policy will set out in detail which perils are covered by the policy and
which are not. Below are non-exhaustive lists of the many different types of insurance that exist. A single
policy may cover risks in one or more of the categories set out below. For example, vehicle insurance
would typically cover both the property risk (theft or damage to the vehicle) and the liability risk (legal
claims arising from an accident). A home insurance policy in the United States typically includes coverage
for damage to the home and the owner's belongings, certain legal claims against the owner, and even a
small amount of coverage for medical expenses of guests who are injured on the owner's property.

Business insurance can take a number of different forms, such as the various kinds of professional liability
insurance, also called professional indemnity (PI), which are discussed below under that name; and the
business owner's policy (BOP), which packages into one policy many of the kinds of coverage that a
business owner needs, in a way analogous to how homeowners' insurance packages the coverages that a
homeowner needs.[43]

Vehicle insurance
Vehicle insurance protects the policyholder against financial loss in
the event of an incident involving a vehicle they own, such as in a
traffic collision.

Coverage typically includes:

Property coverage, for damage to or theft of the car

Liability coverage, for the legal responsibility to others for
bodily injury or property damage
A wrecked vehicle in Copenhagen
Medical coverage, for the cost of treating injuries,
rehabilitation and sometimes lost wages and funeral
expenses

Gap insurance
Gap insurance covers the excess amount on an auto loan in an instance where the policyholder's insurance
company does not cover the entire loan. Depending on the company's specific policies it might or might not
cover the deductible as well. This coverage is marketed for those who put low down payments, have high
interest rates on their loans, and those with 60-month or longer terms. Gap insurance is typically offered by
a finance company when the vehicle owner purchases their vehicle, but many auto insurance companies
offer this coverage to consumers as well.

Health insurance
Health insurance policies cover the cost of medical treatments.
Dental insurance, like medical insurance, protects policyholders for
dental costs. In most developed countries, all citizens receive some
health coverage from their governments, paid through taxation. In
most countries, health insurance is often part of an employer's
Great Western Hospital, Swindon
benefits.

Income protection insurance

Disability insurance policies provide financial support in
the event of the policyholder becoming unable to work
because of disabling illness or injury. It provides monthly
support to help pay such obligations as mortgage loans
and credit cards. Short-term and long-term disability
policies are available to individuals, but considering the
expense, long-term policies are generally obtained only
by those with at least six-figure incomes, such as
doctors, lawyers, etc. Short-term disability insurance
covers a person for a period typically up to six months,
paying a stipend each month to cover medical bills and Workers' compensation, or
other necessities. employers' liability insurance, is
Long-term disability insurance covers an individual's compulsory in some countries.
expenses for the long term, up until such time as they are
considered permanently disabled and thereafter
Insurance companies will often try to encourage the person back into employment in
preference to and before declaring them unable to work at all and therefore totally disabled.
Disability overhead insurance allows business owners to cover the overhead expenses of
their business while they are unable to work.
Total permanent disability insurance provides benefits when a person is permanently
disabled and can no longer work in their profession, often taken as an adjunct to life
insurance.
Workers' compensation insurance replaces all or part of a worker's wages lost and
accompanying medical expenses incurred because of a job-related injury.

Casualty insurance
Casualty insurance insures against accidents, not necessarily tied to any specific property. It is a broad
spectrum of insurance that a number of other types of insurance could be classified, such as auto, workers
compensation, and some liability insurances.

Crime insurance is a form of casualty insurance that covers the policyholder against losses
arising from the criminal acts of third parties. For example, a company can obtain crime
insurance to cover losses arising from theft or embezzlement.
Terrorism insurance provides protection against any loss or damage caused by terrorist
activities. In the United States in the wake of 9/11, the Terrorism Risk Insurance Act 2002
(TRIA) set up a federal program providing a transparent system of shared public and private
compensation for insured losses resulting from acts of terrorism. The program was extended
until the end of 2014 by the Terrorism Risk Insurance Program Reauthorization Act 2007
(TRIPRA).
Kidnap and ransom insurance is designed to protect individuals and corporations operating
in high-risk areas around the world against the perils of kidnap, extortion, wrongful detention
 and hijacking.
Political risk insurance is a form of casualty insurance that can be taken out by businesses
with operations in countries in which there is a risk that revolution or other political conditions
could result in a loss.

Life insurance
Life insurance provides a monetary benefit to a decedent's family or other
designated beneficiary, and may specifically provide for income to an
insured person's family, burial, funeral and other final expenses. Life
insurance policies often allow the option of having the proceeds paid to
the beneficiary either in a lump sum cash payment or an annuity. In most
states, a person cannot purchase a policy on another person without their
knowledge.

Annuities provide a stream of payments and are generally classified as

insurance because they are issued by insurance companies, are regulated
as insurance, and require the same kinds of actuarial and investment
management expertise that life insurance requires. Annuities and pensions
that pay a benefit for life are sometimes regarded as insurance against the
Amicable Society for a
possibility that a retiree will outlive his or her financial resources. In that
Perpetual Assurance Office,
sense, they are the complement of life insurance and, from an Serjeants' Inn, Fleet Street,
underwriting perspective, are the mirror image of life insurance. London, 1801

Certain life insurance contracts accumulate cash values, which may be

taken by the insured if the policy is surrendered or which may be borrowed against. Some policies, such as
annuities and endowment policies, are financial instruments to accumulate or liquidate wealth when it is
needed.

In many countries, such as the United States and the UK, the tax law provides that the interest on this cash
value is not taxable under certain circumstances. This leads to widespread use of life insurance as a tax-
efficient method of saving as well as protection in the event of early death.

In the United States, the tax on interest income on life insurance policies and annuities is generally deferred.
However, in some cases the benefit derived from tax deferral may be offset by a low return. This depends
upon the insuring company, the type of policy and other variables (mortality, market return, etc.). Moreover,
other income tax saving vehicles (e.g., IRAs, 401(k) plans, Roth IRAs) may be better alternatives for value
accumulation.

Burial insurance
Burial insurance is an old type of life insurance which is paid out upon death to cover final expenses, such
as the cost of a funeral. The Greeks and Romans introduced burial insurance c. 600 CE when they
organized guilds called "benevolent societies" which cared for the surviving families and paid funeral
expenses of members upon death. Guilds in the Middle Ages served a similar purpose, as did friendly
societies during Victorian times.

Property
Property insurance provides protection against risks to property,
such as fire, theft or weather damage. This may include specialized
forms of insurance such as fire insurance, flood insurance,
earthquake insurance, home insurance, inland marine insurance or
boiler insurance. The term property insurance may, like casualty
insurance, be used as a broad category of various subtypes of
insurance, some of which are listed below:
This tornado damage to an Illinois
Aviation insurance protects aircraft hulls and spares, and home would be considered an "Act of
associated liability risks, such as passenger and third-
God" for insurance purposes.
party liability. Airports may also appear under this
subcategory, including air traffic control and refuelling
operations for international airports through to smaller
domestic exposures.
Boiler insurance (also known as boiler and machinery
insurance, or equipment breakdown insurance) insures
against accidental physical damage to boilers,
equipment or machinery.
Builder's risk insurance insures against the risk of
physical loss or damage to property during construction. US Airways Flight 1549 was written
Builder's risk insurance is typically written on an "all risk" off after ditching into the Hudson
basis covering damage arising from any cause (including River.
the negligence of the insured) not otherwise expressly
excluded. Builder's risk insurance is coverage that
protects a person's or organization's insurable interest in materials, fixtures or equipment
being used in the construction or renovation of a building or structure should those items
sustain physical loss or damage from an insured peril.[44]
Crop insurance may be purchased by farmers to reduce or manage various risks associated
with growing crops. Such risks include crop loss or damage caused by weather, hail,
drought, frost damage, pests[45] (including especially insects), or disease[46][45]—some of
these being termed named perils.[45] Index-based insurance uses models of how climate
extremes affect crop production to define certain climate triggers that if surpassed have high
probabilities of causing substantial crop loss. When harvest losses occur associated with
exceeding the climate trigger threshold, the index-insured farmer is entitled to a
compensation payment.[47]
Earthquake insurance is a form of property insurance that pays the policyholder in the event
of an earthquake that causes damage to the property. Most ordinary home insurance policies
do not cover earthquake damage. Earthquake insurance policies generally feature a high
deductible. Rates depend on location and hence the likelihood of an earthquake, as well as
the construction of the home.
Fidelity bond is a form of casualty insurance that covers policyholders for losses incurred as
a result of fraudulent acts by specified individuals. It usually insures a business for losses
caused by the dishonest acts of its employees.
 Flood insurance protects against property loss due to
flooding. Many U.S. insurers do not provide flood
insurance in some parts of the country. In response to
this, the federal government created the National Flood
Insurance Program which serves as the insurer of last
resort.
Home insurance, also commonly called hazard
insurance or homeowners insurance (often abbreviated
in the real estate industry as HOI), provides coverage for
Hurricane Katrina caused over $80
damage or destruction of the policyholder's home. In
some geographical areas, the policy may exclude certain billion of storm and flood damage.
types of risks, such as flood or earthquake, that require
additional coverage. Maintenance-related issues are
typically the homeowner's responsibility. The policy may include inventory, or this can be
bought as a separate policy, especially for people who rent housing. In some countries,
insurers offer a package which may include liability and legal responsibility for injuries and
property damage caused by members of the household, including pets.[48]
Landlord insurance covers residential or commercial property that is rented to tenants. It also
covers the landlord's liability for the occupants at the property. Most homeowners' insurance,
meanwhile, cover only owner-occupied homes and not liability or damages related to
tenants.[49]
Marine insurance and marine cargo insurance cover the loss or damage of vessels at sea or
on inland waterways, and of cargo in transit, regardless of the method of transit. When the
owner of the cargo and the carrier are separate corporations, marine cargo insurance
typically compensates the owner of cargo for losses sustained from fire, shipwreck, etc., but
excludes losses that can be recovered from the carrier or the carrier's insurance. Many
marine insurance underwriters will include "time element" coverage in such policies, which
extends the indemnity to cover loss of profit and other business expenses attributable to the
delay caused by a covered loss.
Renters' insurance, often called tenants' insurance, is an insurance policy that provides
some of the benefits of homeowners' insurance, but does not include coverage for the
dwelling, or structure, with the exception of small alterations that a tenant makes to the
structure.
Supplemental natural disaster insurance covers specified expenses after a natural disaster
renders the policyholder's home uninhabitable. Periodic payments are made directly to the
insured until the home is rebuilt or a specified time period has elapsed.
Surety bond insurance is a three-party insurance guaranteeing the performance of the
principal.
Volcano insurance is a specialized insurance protecting
against damage arising specifically from volcanic
eruptions.
Windstorm insurance is an insurance covering the
damage that can be caused by wind events such as
hurricanes.

Liability
The demand for terrorism insurance
Liability insurance is a broad superset that covers legal claims
surged after 9/11.
against the insured. Many types of insurance include an aspect of
liability coverage. For example, a homeowner's insurance policy
will normally include liability coverage which protects the insured in the event of a claim brought by
someone who slips and falls on the property; automobile insurance also includes an aspect of liability
insurance that indemnifies against the harm that a crashing car can cause to others' lives, health, or property.
The protection offered by a liability insurance policy is twofold: a legal defense in the event of a lawsuit
commenced against the policyholder and indemnification (payment on behalf of the insured) with respect to
a settlement or court verdict. Liability policies typically cover only the negligence of the insured, and will
not apply to results of wilful or intentional acts by the insured.

Public liability insurance or general liability insurance

covers a business or organization against claims should
its operations injure a member of the public or damage
their property in some way.
Directors and officers liability insurance (D&O) protects
an organization (usually a corporation) from costs
associated with litigation resulting from errors made by
directors and officers for which they are liable.
Environmental liability or environmental impairment
insurance protects the insured from bodily injury, property The subprime mortgage crisis was
damage and cleanup costs as a result of the dispersal,
the source of many liability insurance
release or escape of pollutants.
losses.
Errors and omissions insurance (E&O) is business
liability insurance for professionals such as insurance
agents, real estate agents and brokers, architects, third-party administrators (TPAs) and other
business professionals.
Prize indemnity insurance protects the insured from giving away a large prize at a specific
event. Examples would include offering prizes to contestants who can make a half-court shot
at a basketball game, or a hole-in-one at a golf tournament.
Professional liability insurance, also called professional indemnity insurance (PI), protects
insured professionals such as architectural corporations and medical practitioners against
potential negligence claims made by their patients/clients. Professional liability insurance
may take on different names depending on the profession. For example, professional liability
insurance in reference to the medical profession may be called medical malpractice
insurance.
Often a commercial insured's liability insurance program consists of several layers. The first layer of
insurance generally consists of primary insurance, which provides first dollar indemnity for judgments and
settlements up to the limits of liability of the primary policy. Generally, primary insurance is subject to a
deductible and obligates the insurer to defend the insured against lawsuits, which is normally accomplished
by assigning counsel to defend the insured. In many instances, a commercial insured may elect to self-
insure. Above the primary insurance or self-insured retention, the insured may have one or more layers of
excess insurance to provide coverage additional limits of indemnity protection. There are a variety of types
of excess insurance, including "stand-alone" excess policies (policies that contain their own terms,
conditions, and exclusions), "follow form" excess insurance (policies that follow the terms of the underlying
policy except as specifically provided), and "umbrella" insurance policies (excess insurance that in some
circumstances could provide coverage that is broader than the underlying insurance).[50]

Credit
Credit insurance repays some or all of a loan when the borrower is insolvent.

Mortgage insurance insures the lender against default by the borrower. Mortgage insurance
is a form of credit insurance, although the name "credit insurance" more often is used to refer
 to policies that cover other kinds of debt.
Many credit cards offer payment protection plans which are a form of credit insurance.
Trade credit insurance is business insurance over the accounts receivable of the insured.
The policy pays the policy holder for covered accounts receivable if the debtor defaults on
payment.
Collateral protection insurance (CPI) insures property (primarily vehicles) held as collateral
for loans made by lending institutions.

Cyber attack insurance

Cyber-insurance is a business lines insurance product intended to provide coverage to corporations from
Internet-based risks, and more generally from risks relating to information technology infrastructure,
information privacy, information governance liability, and activities related thereto.

Other types
All-risk insurance is an insurance that covers a wide range of incidents and perils, except
those noted in the policy. All-risk insurance is different from peril-specific insurance that
cover losses from only those perils listed in the policy.[51] In car insurance, all-risk policy
includes also the damages caused by the own driver.
Bloodstock insurance covers individual horses or a
number of horses under common ownership. Coverage
is typically for mortality as a result of accident, illness or
disease but may extend to include infertility, in-transit
loss, veterinary fees, and prospective foal.
Business interruption insurance covers the loss of
income, and the expenses incurred, after a covered peril
interrupts normal business operations.
Defense Base Act (DBA) insurance provides coverage
High-value horses may be insured
for civilian workers hired by the government to perform under a bloodstock policy.
contracts outside the United States and Canada. DBA is
required for all U.S. citizens, U.S. residents, U.S. Green
Card holders, and all employees or subcontractors hired
on overseas government contracts. Depending on the country, foreign nationals must also be
covered under DBA. This coverage typically includes expenses related to medical treatment
and loss of wages, as well as disability and death benefits.
Expatriate insurance provides individuals and organizations operating outside of their home
country with protection for automobiles, property, health, liability and business pursuits.
Hired-in Plant Insurance covers liability where, under a contract of hire, the customer is liable
to pay for the cost of hired-in equipment and for any rental charges due to a plant hire firm,
such as construction plant and machinery.[52]
Legal expenses insurance covers policyholders for the potential costs of legal action against
an institution or an individual. When something happens which triggers the need for legal
action, it is known as "the event". There are two main types of legal expenses insurance:
before the event insurance and after the event insurance.
Livestock insurance is a specialist policy provided to, for example, commercial or hobby
farms, aquariums, fish farms or any other animal holding. Cover is available for mortality or
economic slaughter as a result of accident, illness or disease but can extend to include
destruction by government order.
 Media liability insurance is designed to cover professionals that engage in film and
television production and print, against risks such as defamation.
Nuclear incident insurance covers damages resulting from an incident involving radioactive
materials and is generally arranged at the national level. (See the nuclear exclusion clause
and, for the United States, the Price–Anderson Nuclear Industries Indemnity Act.)
Over-redemption insurance is purchased by businesses to protect themselves financially in
the event that a promotion ends up becoming more successful than was originally
anticipated and/or budgeted for.
Pet insurance insures pets against accidents and illnesses; some companies cover
routine/wellness care and burial, as well.
Pollution insurance usually takes the form of first-party coverage for contamination of insured
property either by external or on-site sources. Coverage is also afforded for liability to third
parties arising from contamination of air, water, or land due to the sudden and accidental
release of hazardous materials from the insured site. The policy usually covers the costs of
cleanup and may include coverage for releases from underground storage tanks. Intentional
acts are specifically excluded.
Purchase insurance is aimed at providing protection on the products people purchase.
Purchase insurance can cover individual purchase protection, warranties, guarantees, care
plans and even mobile phone insurance. Such insurance is normally limited in the scope of
problems that are covered by the policy.
Tax insurance is increasingly being used in corporate transactions to protect taxpayers in the
event that a tax position it has taken is challenged by the IRS or a state, local, or foreign
taxing authority[53]
Title insurance provides a guarantee that title to real property is vested in the purchaser or
mortgagee, free and clear of liens or encumbrances. It is usually issued in conjunction with a
search of the public records performed at the time of a real estate transaction.
Travel insurance is an insurance cover taken by those who travel abroad, which covers
certain losses such as medical expenses, loss of personal belongings, travel delay, and
personal liabilities.
Tuition insurance insures students against involuntary withdrawal from cost-intensive
educational institutions
Interest rate insurance protects the holder from adverse changes in interest rates, for
instance for those with a variable rate loan or mortgage
Divorce insurance is a form of contractual liability insurance that pays the insured a cash
benefit if their marriage ends in divorce.

Insurance financing vehicles

Fraternal insurance is provided on a cooperative basis by fraternal benefit societies or other
social organizations.[54]
No-fault insurance is a type of insurance policy (typically automobile insurance) where
insureds are indemnified by their own insurer regardless of fault in the incident.
Protected self-insurance is an alternative risk financing mechanism in which an organization
retains the mathematically calculated cost of risk within the organization and transfers the
catastrophic risk with specific and aggregate limits to an insurer so the maximum total cost of
the program is known. A properly designed and underwritten Protected Self-Insurance
Program reduces and stabilizes the cost of insurance and provides valuable risk
management information.
Retrospectively rated insurance is a method of establishing a premium on large commercial
accounts. The final premium is based on the insured's actual loss experience during the
policy term, sometimes subject to a minimum and maximum premium, with the final premium
 determined by a formula. Under this plan, the current year's premium is based partially (or
wholly) on the current year's losses, although the premium adjustments may take months or
years beyond the current year's expiration date. The rating formula is guaranteed in the
insurance contract. Formula: retrospective premium = converted loss + basic premium × tax
multiplier. Numerous variations of this formula have been developed and are in use.
Formal self-insurance (active risk retention) is the deliberate decision to pay for otherwise
insurable losses out of one's own money.[55] 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.[56] 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.[56]
Reinsurance is a type of insurance purchased by insurance companies or self-insured
employers to protect against unexpected losses. Financial reinsurance is a form of
reinsurance that is primarily used for capital management rather than to transfer insurance
risk.
Social insurance can be many things to many people in many countries. But a summary of
its essence is that it is a collection of insurance coverages (including components of life
insurance, disability income insurance, unemployment insurance, health insurance, and
others), plus retirement savings, that requires participation by all citizens. By forcing
everyone in society to be a policyholder and pay premiums, it ensures that everyone can
become a claimant when or if they need to. Along the way, this inevitably becomes related to
other concepts such as the justice system and the welfare state. This is a large, complicated
topic that engenders tremendous debate, which can be further studied in the following
articles (and others):
National Insurance
Social safety net
Social security
Social Security debate (United States)
Social Security (United States)
Social welfare provision
Stop-loss insurance provides protection against catastrophic or unpredictable losses. It is
purchased by organizations who do not want to assume 100% of the liability for losses
arising from the plans. Under a stop-loss policy, the insurance company becomes liable for
losses that exceed certain limits called deductibles.

Closed community and governmental self-insurance

Some communities prefer to create virtual insurance among themselves by other means than contractual risk
transfer, which assigns explicit numerical values to risk. A number of 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.

In the United States, the most prevalent form of self-insurance is governmental risk management pools.
They are self-funded cooperatives, operating as carriers of coverage for the majority of governmental
entities today, such as county governments, municipalities, and school districts. Rather than these entities
independently self-insure and risk bankruptcy from a large judgment or catastrophic loss, such
governmental entities form a risk pool. Such pools begin their operations by capitalization through member
deposits or bond issuance. Coverage (such as general liability, auto liability, professional liability, workers
compensation, and property) is offered by the pool to its members, similar to coverage offered by insurance
companies. However, self-insured pools offer members lower rates (due to not needing insurance brokers),
increased benefits (such as loss prevention services) and subject matter expertise. Of approximately 91,000
distinct governmental entities operating in the United States, 75,000 are members of self-insured pools in
various lines of coverage, forming approximately 500 pools. Although a relatively small corner of the
insurance market, the annual contributions (self-insured premiums) to such pools have been estimated up to
17 billion dollars annually.[57]

Insurance companies
Insurance companies may provide any combination of insurance
types, but are often classified into three groups:[58]

Life insurance companies, that provide life insurance,

annuities and pensions products and bear similarities to
asset management businesses[58]
Non-life or property/casualty insurance companies,
which provides other types of insurance.
Health insurance companies, which sometimes provide
life insurance or employee benefits as well Certificate issued by Republic Fire
General insurance companies can be further divided into these sub Insurance Co. of New York c. 1860
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 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.

Mutual versus proprietary

Insurance companies are commonly classified as either mutual or proprietary companies.[59] Mutual
companies are owned by the policyholders, while shareholders (who may or may not own policies) own
proprietary insurance companies.
Demutualization of mutual insurers to form stock companies, as well as the formation of a hybrid known as
a mutual holding company, became common in some countries, such as the United States, in the late 20th
century. However, not all states permit mutual holding companies.

Reinsurance companies
Reinsurance companies are insurance companies that provide policies to other insurance companies,
allowing them to reduce their risks and protect themselves from substantial losses.[60] The reinsurance
market is dominated by a few large companies with huge reserves. A reinsurer may also be a direct writer of
insurance risks as well.

Captive insurance companies

Captive insurance companies can be defined as limited-purpose insurance companies established with the
specific objective of financing risks emanating from their parent group or groups. This definition can
sometimes be extended to include some of the risks of the parent company's customers. In short, it is an in-
house self-insurance vehicle. Captives may take the form of a "pure" entity, which is a 100% subsidiary of
the self-insured parent company; of a "mutual" captive, which insures the collective risks of members of an
industry; and of an "association" captive, which self-insures individual risks of the members of a
professional, commercial or industrial association. Captives represent commercial, economic and tax
advantages to their sponsors because of the reductions in costs they help create and for the ease of insurance
risk management and the flexibility for cash flows they generate. Additionally, they may provide coverage
of risks which is neither available nor offered in the traditional insurance market at reasonable prices.

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

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

Heavy and increasing premium costs in almost every line of coverage

Difficulties in insuring certain types of fortuitous risk
Differential coverage standards in various parts of the world
Rating structures which reflect market trends rather than individual loss experience
Insufficient credit for deductibles or loss control efforts

Other forms
Other possible forms for an insurance company include reciprocals, in which policyholders reciprocate in
sharing risks, and Lloyd's organizations.[61]

Admitted versus non-admitted

Admitted insurance companies are those in the United States that have been admitted or licensed by the
state licensing agency. The insurance they provide is called admitted insurance. Non-admitted companies
have not been approved by the state licensing agency, but are allowed to provide insurance under special
circumstances when they meet an insurance need that admitted companies cannot or will not meet.[62]

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

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

Financial stability and rating

The financial stability and strength of an insurance company is a consideration when buying an insurance
contract. An insurance premium paid currently provides coverage for losses that might arise many years in
the future. For that reason, a more financially stable insurance carrier reduces the risk of the insurance
company becoming insolvent, leaving their policyholders with no coverage (or coverage only from a
government-backed insurance pool or other arrangements with less attractive payouts for losses). A number
of independent rating agencies provide information and rate the financial viability of insurance companies.

Insurance companies are rated by various agencies such as AM Best. The ratings include the company's
financial strength, which measures its ability to pay claims. It also rates financial instruments issued by the
insurance company, such as bonds, notes, and securitization products.

Across the world

Advanced economies account for the bulk of the global insurance industry. According to Swiss Re, the
global insurance market wrote $6.782 trillion in direct premiums in 2022.[63] ("Direct premiums" means
premiums written directly by insurers before accounting for ceding of risk to reinsurers.) As usual, the
United States was the country with the largest insurance market with $2.959 trillion (43.6%) of direct
premiums written, with the People's Republic of China coming in second at only $697 billion (10.3%),
Japan coming in third at $337 billion (5.0%), and the United Kingdom coming in fourth at $363 billion
(5.4%).[63] However, the European Union's single market is the actual second largest market, with 17
percent market share.[63]

Regulatory differences
In the United States, insurance is regulated by the states under the McCarran–Ferguson Act, with "periodic
proposals for federal intervention", and a nonprofit coalition of state insurance agencies called the National
Association of Insurance Commissioners works to harmonize the country's different laws and
regulations.[64] The National Conference of Insurance Legislators (NCOIL) also works to harmonize the
different state laws.[65]

In the European Union, the Third Non-Life Directive and the Third Life Directive, both passed in 1992 and
effective 1994, created a single insurance market in Europe and allowed insurance companies to offer
insurance anywhere in the EU (subject to permission from authority in the head office) and allowed
insurance consumers to purchase insurance from any insurer in the EU.[66] As far as insurance in the United
Kingdom, the Financial Services Authority took over insurance regulation from the General Insurance
Standards Council in 2005;[67] laws passed include the Insurance Companies Act 1973 and another in
1982,[68] and reforms to warranty and other aspects under discussion as of 2012.[69]

The insurance industry in China was nationalized in 1949 and thereafter offered by only a single state-
owned company, the People's Insurance Company of China, which was eventually suspended as demand
declined in a communist environment. In 1978, market reforms led to an increase in the market and by 1995
a comprehensive Insurance Law of the People's Republic of China[70] was passed, followed in 1998 by the
formation of China Insurance Regulatory Commission (CIRC), which has broad regulatory authority over
the insurance market of China.[71]

In India IRDA is insurance regulatory authority. As per the section 4 of IRDA Act 1999, Insurance
Regulatory and Development Authority (IRDA), which was constituted by an act of parliament. National
Insurance Academy, Pune is apex insurance capacity builder institute promoted with support from Ministry
of Finance and by LIC, Life & General Insurance companies.

In 2017, within the framework of the joint project of the Bank of Russia and Yandex, a special check mark
(a green circle with a tick and 'Реестр ЦБ РФ' (Unified state register of insurance entities) text box)
appeared in the search for Yandex system, informing the consumer that the company's financial services are
offered on the marked website, which has the status of an insurance company, a broker or a mutual
insurance association.[72]

Controversies

Does not reduce the risk

Insurance is just a risk transfer mechanism wherein the financial burden which may arise due to some
fortuitous event is transferred to a bigger entity (i.e., an insurance company) by way of paying premiums.
This only reduces the financial burden and not the actual chances of happening of an event. Insurance is a
risk for both the insurance company and the insured. The insurance company understands the risk involved
and will perform a risk assessment when writing the policy.

As a result, the premiums may go up if they determine that the policyholder will file a claim. However,
premiums might reduce if the policyholder commits to a risk management program as recommended by the
insurer.[73] It is therefore important that insurers view risk management as a joint initiative between
policyholder and insurer since a robust risk management plan minimizes the possibility of a large claim for
the insurer while stabilizing or reducing premiums for the policyholder.

If a person is financially stable and plans for life's unexpected events, they may be able to go without
insurance. However, they must have enough to cover a total and complete loss of employment and of their
possessions. Some states will accept a surety bond, a government bond, or even making a cash deposit with
the state.

Moral hazard
An insurance company may inadvertently find that its insureds may not be as risk-averse as they might
otherwise be (since, by definition, the insured has transferred the risk to the insurer), a concept known as
moral hazard. This 'insulates' many from the true costs of living with risk, negating measures that can
mitigate or adapt to risk and leading some to describe insurance schemes as potentially maladaptive.[74]

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.

For example, most insurance policies in the English language today

have been carefully drafted in plain English; the industry learned
9/11 was a major insurance loss, but
the hard way that many courts will not enforce policies against
there were disputes over the World
insureds when the judges themselves cannot understand what the
Trade Center's insurance policy.
policies are saying. Typically, courts construe ambiguities in
insurance policies against the insurance company and in favor of
coverage under the policy.

Many institutional insurance purchasers buy insurance through an insurance broker. While on the surface it
appears the broker represents the buyer (not the insurance company), and typically counsels the buyer on
appropriate coverage and policy limitations, in the vast majority of cases a broker's compensation comes in
the form of a commission as a percentage of the insurance premium, creating a conflict of interest in that the
broker's financial interest is tilted toward encouraging an insured to purchase more insurance than might be
necessary at a higher price. A broker generally holds contracts with many insurers, thereby allowing the
broker to "shop" the market for the best rates and coverage possible.

Insurance may also be purchased through an agent. A tied agent, working exclusively with one insurer,
represents the insurance company from whom the policyholder buys (while a free agent sells policies of
various insurance companies). Just as there is a potential conflict of interest with a broker, an agent has a
different type of conflict. Because agents work directly for the insurance company, if there is a claim the
agent may advise the client to the benefit of the insurance company. Agents generally cannot offer as broad
a range of selection compared to an insurance broker.
An independent insurance consultant advises insureds on a fee-for-service retainer, similar to an attorney,
and thus offers completely independent advice, free of the financial conflict of interest of brokers or agents.
However, such a consultant must still work through brokers or agents in order to secure coverage for their
clients.

Limited consumer benefits

In the United States, economists and consumer advocates generally consider insurance to be worthwhile for
low-probability, catastrophic losses, but not for high-probability, small losses. Because of this, consumers
are advised to select high deductibles and to not insure losses which would not cause a disruption in their
life. However, consumers have shown a tendency to prefer low deductibles and to prefer to insure relatively
high-probability, small losses over low-probability, perhaps due to not understanding or ignoring the low-
probability risk. This is associated with reduced purchasing of insurance against low-probability losses, and
may result in increased inefficiencies from moral hazard.[75]

Redlining
Redlining is the practice of denying insurance coverage in specific geographic areas, supposedly because of
a high likelihood of loss, while the alleged motivation is unlawful discrimination. Racial profiling or
redlining has a long history in the property insurance industry in the United States. From a review of
industry underwriting and marketing materials, court documents, and research by government agencies,
industry and community groups, and academics, it is clear that race has long affected and continues to affect
the policies and practices of the insurance industry.[76]

In July 2007, the US Federal Trade Commission (FTC) released a report presenting the results of a study
concerning credit-based insurance scores in automobile insurance. The study found that these scores are
effective predictors of risk. It also showed that African-Americans and Hispanics are substantially
overrepresented in the lowest credit scores, and substantially underrepresented in the highest, while
Caucasians and Asians are more evenly spread across the scores. The credit scores were also found to
predict risk within each of the ethnic groups, leading the FTC to conclude that the scoring models are not
solely proxies for redlining. The FTC indicated little data was available to evaluate benefit of insurance
scores to consumers.[77] The report was disputed by representatives of the Consumer Federation of
America, the National Fair Housing Alliance, the National Consumer Law Center, and the Center for
Economic Justice, for relying on data provided by the insurance industry.[78]

All states have provisions in their rate regulation laws or in their fair trade practice acts that prohibit unfair
discrimination, often called redlining, in setting rates and making insurance available.[79]

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

Insurance patents
New assurance products can now be protected from copying with a business method patent in the United
States.

A recent example of a new insurance product that is patented is Usage Based auto insurance. Early versions
were independently invented and patented by a major US auto insurance company, Progressive Auto
Insurance (U.S. patent 5,797,134 ([Link] and a Spanish
independent inventor, Salvador Minguijon Perez.[80]

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

Many insurance executives are opposed to patenting insurance products because it creates a new risk for
them. The Hartford insurance company, for example, recently had to pay $80 million to an independent
inventor, Bancorp Services, in order to settle a patent infringement and theft of trade secret lawsuit for a
type of corporate owned life insurance product invented and patented by Bancorp.

There are currently about 150 new patent applications on insurance inventions filed per year in the United
States. The rate at which patents have been issued has steadily risen from 15 in 2002 to 44 in 2006.[81]

The first insurance patent to be granted was[82] including another example of an application posted was.[83]
It was posted on 6 March 2009. This patent application describes a method for increasing the ease of
changing insurance companies.[84]

Insurance on demand
Insurance on demand (also IoD) is an insurance service that provides clients with insurance protection when
they need, i.e. only episodic rather than on 24/7 basis as typically provided by traditional insurers (e.g.
clients can purchase an insurance for one single flight rather than a longer-lasting travel insurance plan).

Insurance industry and rent-seeking

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

Religious concerns
Muslim scholars have varying opinions about life insurance. Life insurance policies that earn interest (or
guaranteed bonus/NAV) are generally considered to be a form of riba (usury) and some consider even
policies that do not earn interest to be a form of gharar (speculation). Some argue that gharar is not present
due to the actuarial science behind the underwriting.[85] Jewish rabbinical scholars also have expressed
reservations regarding insurance as an avoidance of God's will but most find it acceptable in moderation.[86]

Some Christians believe insurance represents a lack of faith[87][88] and there is a long history of resistance
to commercial insurance in Anabaptist communities (Mennonites, Amish, Hutterites, Brethren in Christ) but
many participate in community-based self-insurance programs that spread risk within their
communities.[89][90][91]

See also
Agent of record Loss control consultant
DIRTI 5 – abbreviation for depreciation, Outline of finance
interest repairs, taxes, and insurance Reinsurance
Earthquake loss Risk pool
Financial adviser Social security
Global assets under management Tertiary sector of the economy (sector of
Insurance broker the economy to which insurance belongs)
Insurance fraud The Invisible Bankers: Everything the
Insurance Hall of Fame Insurance Industry Never Wanted You to
Know (book)
Insurance law
Universal health care
International Association for the Study of
Insurance Economics Welfare state
List of insurance topics Uberrima fides – Latin for "utmost good
faith", a legal doctrine used in insurance
Country-specific articles:

Insurance in Australia
Insurance industry in China
Insurance in India
Insurance in the United Kingdom
Insurance in the United States

Notes
1. However, the bankruptcy of the insured with a "reimbursement" policy does not relieve the
insurer. Certain types of insurance, e.g., workers' compensation and personal automobile
 liability, are subject to statutory requirements that injured parties have direct access to
coverage.

References

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Further reading
Einav, Liran; Finkelstein, Amy; Fisman, Ray (2023). Risky Business: Why Insurance Markets
Fail and What to Do About It. ([Link]
s/) Yale University Press. ISBN 978-0-300-26855-3.
 Insurance Law and Regulation: Cases and Materials by Kenneth S. Abraham. New York,
N.Y : Foundation Press, 2005. ISBN 9781587788826

External links
Congressional Research Service (CRS) Reports regarding the US Insurance industry (http
s://[Link]/research/health/congressional-research-service-reports-on-health)
Federation of European Risk Management Associations ([Link]
Insurance ([Link] at Curlie
Insurance Bureau of Canada ([Link]
Insurance Information Institute ([Link]
National Association of Insurance Commissioners ([Link]
The British Library ([Link]
s/business/[Link]) – finding information on the insurance industry (UK focus)

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