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Top Insurance Tips
1. Importance of a Good Driving Record
2. Life Insurance Offered by Employer
3. Homeowners Insurance vs. Title Insurance
4. Know your Health before you Shop
5. Offer Only Coverage your Employees Plan to Use
6. Understand your Business Insurance Needs
Helpful Insurance Articles
Tips to Save on Car Insurance
The Different Types of Life Insurance
Evaluating Homeowners Insurance Quotes
Will I Have Health Insurance When I Retire?
How to Protect Yourself When Renting a Home
How Can Not Having Dental Insurance Cost me a Fortune?
Ways to Save with Group Health Insurance
Can I Protect My Business from an Unforeseen Tragedy?
Top Insurance Tips
1. Importance of a Good Driving Record
2. Life Insurance Offered by Employer
3. Homeowners Insurance vs. Title Insurance
4. Know your Health before you Shop
5. Offer Only Coverage your Employees Plan to Use
6. Understand your Business Insurance Needs
Helpful Insurance Articles
Tips to Save on Car Insurance
The Different Types of Life Insurance
Evaluating Homeowners Insurance Quotes
Will I Have Health Insurance When I Retire?
How to Protect Yourself When Renting a Home
How Can Not Having Dental Insurance Cost me a Fortune?
Ways to Save with Group Health Insurance
Can I Protect My Business from an Unforeseen Tragedy?
Comparison
The Commonwealth Fund, in its annual survey, "Mirror, Mirror on the Wall", compares the performance of the health care systems in Australia, New Zealand, the United Kingdom, Germany, Canada and the U.S. Its 2007 study found that, although the U.S. system is the most expensive, it consistently under-performs compared to the other countries.[21] One difference between the U.S. and the other countries in the study is that the U.S. is the only country without universal health insurance coverage.
Australia
Main article: Health care in Australia
The public health system is called Medicare. It ensures free universal access to hospital treatment and subsidised out-of-hospital medical treatment. It is funded by a 1.5% tax levy.
The private health system is funded by a number of private health insurance organisations. The largest of these is Medibank Private, which is government-owned, but operates as a government business enterprise under the same regulatory regime as all other registered private health funds. The Coalition Howard government had announced that Medibank would be privatised if it won the 2007 election, however they were defeated by the Australian Labor Party under Kevin Rudd which had already pledged that it would remain in government ownership.
Some private health insurers are 'for profit' enterprises, and some are non-profit organizations such as HCF Health Insurance. Some have membership restricted to particular groups, but the majority have open membership.
Most aspects of private health insurance in Australia are regulated by the Private Health Insurance Act 2007.
The private health system in Australia operates on a "community rating" basis, whereby premiums do not vary solely because of a person's previous medical history, current state of health, or (generally speaking) their age (but see Lifetime Health Cover below). Balancing this are waiting periods, in particular for pre-existing conditions (usually referred to within the industry as PEA, which stands for "pre-existing ailment"). Funds are entitled to impose a waiting period of up to 12 months on benefits for any medical condition the signs and symptoms of which existed during the six months ending on the day the person first took out insurance. They are also entitled to impose a 12-month waiting period for benefits for treatment relating to an obstetric condition, and a 2-month waiting period for all other benefits when a person first takes out private insurance. Funds have the discretion to reduce or remove such waiting periods in individual cases. They are also free not to impose them to begin with, but this would place such a fund at risk of "adverse selection", attracting a disproportionate number of members from other funds, or from the pool of intending members who might otherwise have joined other funds. It would also attract people with existing medical conditions, who might not otherwise have taken out insurance at all because of the denial of benefits for 12 months due to the PEA Rule. The benefits paid out for these conditions would create pressure on premiums for all the fund's members, causing some to drop their membership, which would lead to further rises, and a vicious cycle would ensue.
There are a number of other matters about which funds are not permitted to discriminate between members in terms of premiums, benefits or membership - these include racial origin, religion, sex, sexual orientation, nature of employment, and leisure activities. Premiums for a fund's product that is sold in more than one state can vary from state to state, but not within the same state.
The Australian government has introduced a number of incentives to encourage adults to take out private hospital insurance. These include:
* Lifetime Health Cover: If a person has not taken out private hospital cover by the 1st July after their 30th birthday, then when (and if) they do so after this time, their premiums must include a loading of 2% per annum. Thus, a person taking out private cover for the first time at age 40 will pay a 20 per cent loading. The loading continues for 10 years. The loading applies only to premiums for hospital cover, not to ancillary (extras) cover.
* Medicare Levy Surcharge: People whose taxable income is greater than a specified amount (currently $70,000 for singles and $140,000 for couples) and who do not have an adequate level of private hospital cover must pay a 1% surcharge on top of the standard 1.5% Medicare Levy. The rationale is that if the people in this income group are forced to pay more money one way or another, most would choose to purchase hospital insurance with it, with the possibility of a benefit in the event that they need private hospital treatment - rather than pay it in the form of extra tax as well as having to meet their own private hospital costs.
o The Australian government announced in May 2008 that it proposes to increase the thresholds, to $100,000 for singles and $150,000 for families. These changes require legislative approval. A bill to change the law has been introduced but was not passed by the Senate.[22] A changed version was passed on 16 October 2008. There have been criticisms that the changes will cause many people to drop their private health insurance, causing a further burden on the public hospital system, and a rise in premiums for those who stay with the private system. Other commentators believe the effect will be minimal.[23]
* Private Health Insurance Rebate: The government subsidises the premiums for all private health insurance cover, including hospital and ancillary (extras), by 30%, 35% or 40%.
[edit] Canada
Main article: Health care in Canada
Most health insurance in Canada is administered by each province, under the Canada Health Act, which requires all people to have free access to basic health services. Collectively, the public provincial health insurance systems in Canada are frequently referred to as Medicare. Private health insurance is allowed, but the provincial governments allow it only for services that the public health plans do not cover; for example, semi-private or private rooms in hospitals and prescription drug plans. Canadians are free to use private insurance for elective medical services such as laser vision correction surgery, cosmetic surgery, and other non-basic medical procedures. Some 65% of Canadians have some form of supplementary private health insurance; many of them receive it through their employers.[24] Private-sector services not paid for by the government account for nearly 30 percent of total health care spending.[25]
In 2005, the Supreme Court of Quebec ruled, in Chaoulli v. Quebec, that the province's prohibition on private insurance for health care already insured by the provincial plan could constitute an infringement of the right to life and security if there were long wait times for treatment as happened in this case. Certain other provinces have legislation which financially discourages but does not forbid private health insurance in areas covered by the public plans. The ruling has not changed the overall pattern of health insurance across Canada but has spurred on attempts to tackle the core issues of supply and demand and the impact of wait times.[26]
[edit] France
Main article: Health care in France
The French model of health insurance has been ranked by the World Health Organization as the best in the world, because it permits a high quality of care and nearly total patient freedom. The national system of health insurance was instituted in 1945, just after the end of the Second World War. It was a compromise between Gaullist and Communist representatives in the French parliament. The Conservative Gaullists were opposed to a state-run healthcare system, while the Communists were supportive of a complete nationalisation of health care along a British Beveridge model.
The resulting programme was profession-based : all people working were required to pay a portion of their income to a health insurance fund, which mutualised the risk of illness, and which reimbursed medical expenses at varying rates. Children and spouses of insured people were eligible for benefits, as well. Each fund was free to manage its own budget and reimburse medical expenses at the rate it saw fit.
The government has two responsibilities in this system.
* The first government responsibility is the fixing of the rate at which medical expenses should be negotiated, and it does this in two ways: The Ministry of Health directly negotiates prices of medicine with the manufacturers, based on the average price of sale observed in neighboring countries. A board of doctors and experts decides if the medicine provides a valuable enough medical benefit to be reimbursed (note that most medicine is reimbursed, including homeopathy). In parallel, the government fixes the reimbursment rate for medical services : this means that a doctor is free to charge the fee that he wishes for a consultation or an examination, but the social security system will only reimburse it at a pre-set rate. These tariffs are set annually through negotiation with doctors' representative organisations.
* The second government responsibility is oversight of the health-insurance funds, to ensure that they are correctly managing the sums they receive, and to ensure oversight of the public hospital network.
Today, this system is more-or-less intact. All citizens and legal foreign residents of France are covered by one of these mandatory programs, which continue to be funded by worker participation. However, since 1945, a number of major changes have been introduced. Firstly, the different health-care funds (there are five : General, Independent, Agricultural, Student, Public Servants) now all reimburse at the same rate. Secondly, since 2000, the government now provides health care to those who are not covered by a mandatory regime (those who have never worked and who are not students, meaning the very rich or the very poor). This regime, unlike the worker-financed ones, is financed via general taxation and reimburses at a higher rate than the profession-based system for those who cannot afford to make up the difference. Finally, to counter the rise in health-care costs, the government has installed two plans, (in 2004 and 2006), which require insured people to declare a referring doctor in order to be fully reimbursed for specalist visits, and which installed a mandatory co-pay of 1 € (about $1.45) for a doctor visit, 0,50 € (about 80 ¢) for each box of medicine prescribed, and a fee of 16-18 € (20-25 $) per day for hospital stays and for expensive procedures.
An important element of the French insurance system is solidarity : the more ill a person becomes, the less they pay. This means that for people with serious or chronic illnesses, the insurance system reimburses them 100 % of expenses, and waives their co-pay charges.
Finally, for fees that the mandatory system does not cover, there is a large range of private complementary insurance plans available. The market for these programs is very competitive, and often subsidised by the employer, which means that premiums are usually modest. 85% of French people benefit from complementary private health insurance.
[27][28]
[edit] Netherlands
Main article: Health care in the Netherlands
In 2006, a new system of health insurance came into force in the Netherlands. This new system avoids the two pitfalls of adverse selection and moral hazard associated with traditional forms of health insurance by using a combination of regulation and an insurance equalization pool. Moral hazard is avoided by mandating that insurance companies provide at least one policy which meets a government set minimum standard level of coverage, and all adult residents are obliged by law to purchase this coverage from an insurance company of their choice. All insurance companies receive funds from the equalization pool to help cover the cost of this government-mandated coverage. This pool is run by a regulator which collects salary-based contributions from employers, which make up about 50% of all health care funding, and funding from the government to cover people who cannot afford health care, which makes up an additional 5%.
The remaining 45% of health care funding comes from insurance premiums paid by the public, for which companies compete on price, though the variation between the various competing insurers is only about 5%. However, insurance companies are free to sell additional policies to provide coverage beyond the national minimum. These policies do not receive funding from the equalization pool, but cover additional treatments, such as dental procedures and physiotherapy, which are not paid for by the mandatory policy.
Funding from the equalization pool is distributed to insurance companies for each person they insure under the required policy. However, high-risk individuals get more from the pool, and low-income persons and children under 18 have their insurance paid for entirely. Because of this, insurance companies no longer find insuring high risk individuals an unappealing proposition, avoiding the potential problem of adverse selection.
Insurance companies are not allowed to have co-payments, caps, or deductibles, or to deny coverage to any person applying for a policy, or to charge anything other than their nationally set and published standard premiums. Therefore, every person buying insurance will pay the same price as everyone else buying the same policy, and every person will get at least the minimum level of coverage.
[edit] United Kingdom
Main article: National Health Service
The UK's National Health Service (NHS) is a publicly funded healthcare system that provides coverage to everyone normally resident in the UK. It is not strictly an insurance system because (a) there are no premiums collected, (b) costs are not charged at the patient level and (c) costs are not pre-paid from a pool. However, it does achieve the main aim of insurance which is to spread financial risk arising from ill-health. The costs of running the NHS (est. £104 billion in 2007-8)[29] are met directly from general taxation. The NHS provides the majority of health care in the UK, including primary care, in-patient care, long-term health care, ophthalmology and dentistry.
Private health care has continued parallel to the NHS, paid for largely by private insurance, but it is used by less than 8% of the population, and generally as a top-up to NHS services. There are many treatments that the private sector does not provide. For example, health insurance on pregnancy is generally not covered or covered with restricting clauses.[30] One of the major insurers, BUPA, excludes many forms of treatment and care that most people will need during their lifetime or specialist care most of which are freely available from the NHS. These include:-
ageing, menopause and puberty; AIDS/HIV; allergies or allergic disorders; birth control, conception, sexual problems and sex changes; chronic conditions; complications from excluded or restricted conditions/ treatment; convalescence, rehabilitation and general nursing care ; cosmetic, reconstructive or weight loss treatment; deafness; dental/oral treatment (such as fillings, gum disease, jaw shrinkage, etc); dialysis; drugs and dressings for out-patient or take-home use† ; experimental drugs and treatment; eyesight; HRT and bone densitometry; learning difficulties, behavioural and developmental problems; overseas treatment and repatriation; physical aids and devices; pre-existing or special conditions; pregnancy and childbirth; screening and preventive treatment; sleep problems and disorders; speech disorders; temporary relief of symptoms[31] († = except in exceptional circumstances)
BUPA's competitors include, among others, AXA, Aviva, Groupama Healthcare and Pru Health.
Recently the private sector has been used to increase NHS capacity despite a large proportion of the British public opposing such involvement.[32]. According to the World Health Organization, government funding covered 86% of overall health care expenditures in the UK as of 2004, with private expenditures covering the remaining 14%.[33]
[edit] United States
Main articles: Health insurance in the United States and Health care in the United States
The US market-based health care system relies heavily on private and not-for-profit health insurance, which is the primary source of coverage for most Americans. According to the United States Census Bureau, approximately 84% of Americans have health insurance; some 60% obtain it through an employer, while about 9% purchase it directly. Various government agencies provide coverage to about 27% of Americans (there is some overlap in these figures).[34]
Public programs provide the primary source of coverage for most seniors and for low-income children and families who meet certain eligibility requirements. The primary public programs are Medicare, a federal social insurance program for seniors and certain disabled individuals, Medicaid, funded jointly by the federal government and states but administered at the state level, which covers certain very low income children and their families, and SCHIP, also a federal-state partnership that serves certain children and families who do not qualify for Medicaid but who cannot afford private coverage. Other public programs include military health benefits provided through TRICARE and the Veterans Health Administration and benefits provided through the Indian Health Service. Some states have additional programs for low-income individuals.[35]
In 2006, there were 47 million people in the United States (16% of the population) who were without health insurance for at least part of that year.[34] About 37% of the uninsured live in households with an income over $50,000.[34]
In 2004, US health insurers directly employed almost 470,000 people at an average salary of $61,409.[36] (As of the fourth quarter of 2007, the total US labor force stood at 153.6 million, of whom 146.3 million were employed. Employment related to all forms of insurance totaled 2.3 million.[37] Mean annual earnings for full-time civilian workers as of June 2006 were $41,231; median earnings were $33,634.)[38] The insurance industry also represents a significant lobbying group in the US. For 2008 insurance was the 8th among industries in political contributions to members of Congress, giving $28,654,121, of which 51% was given to Democrats and 49% to Republicans, with the top recipient of insurance industry contributions being Senator John McCain (R-AZ).[39] The leading contributor from the insurance industry — as measured by total political contributions — was AFLAC, Inc., which contributed $907,150 in 2007.[40].
Main article: Health care in Australia
The public health system is called Medicare. It ensures free universal access to hospital treatment and subsidised out-of-hospital medical treatment. It is funded by a 1.5% tax levy.
The private health system is funded by a number of private health insurance organisations. The largest of these is Medibank Private, which is government-owned, but operates as a government business enterprise under the same regulatory regime as all other registered private health funds. The Coalition Howard government had announced that Medibank would be privatised if it won the 2007 election, however they were defeated by the Australian Labor Party under Kevin Rudd which had already pledged that it would remain in government ownership.
Some private health insurers are 'for profit' enterprises, and some are non-profit organizations such as HCF Health Insurance. Some have membership restricted to particular groups, but the majority have open membership.
Most aspects of private health insurance in Australia are regulated by the Private Health Insurance Act 2007.
The private health system in Australia operates on a "community rating" basis, whereby premiums do not vary solely because of a person's previous medical history, current state of health, or (generally speaking) their age (but see Lifetime Health Cover below). Balancing this are waiting periods, in particular for pre-existing conditions (usually referred to within the industry as PEA, which stands for "pre-existing ailment"). Funds are entitled to impose a waiting period of up to 12 months on benefits for any medical condition the signs and symptoms of which existed during the six months ending on the day the person first took out insurance. They are also entitled to impose a 12-month waiting period for benefits for treatment relating to an obstetric condition, and a 2-month waiting period for all other benefits when a person first takes out private insurance. Funds have the discretion to reduce or remove such waiting periods in individual cases. They are also free not to impose them to begin with, but this would place such a fund at risk of "adverse selection", attracting a disproportionate number of members from other funds, or from the pool of intending members who might otherwise have joined other funds. It would also attract people with existing medical conditions, who might not otherwise have taken out insurance at all because of the denial of benefits for 12 months due to the PEA Rule. The benefits paid out for these conditions would create pressure on premiums for all the fund's members, causing some to drop their membership, which would lead to further rises, and a vicious cycle would ensue.
There are a number of other matters about which funds are not permitted to discriminate between members in terms of premiums, benefits or membership - these include racial origin, religion, sex, sexual orientation, nature of employment, and leisure activities. Premiums for a fund's product that is sold in more than one state can vary from state to state, but not within the same state.
The Australian government has introduced a number of incentives to encourage adults to take out private hospital insurance. These include:
* Lifetime Health Cover: If a person has not taken out private hospital cover by the 1st July after their 30th birthday, then when (and if) they do so after this time, their premiums must include a loading of 2% per annum. Thus, a person taking out private cover for the first time at age 40 will pay a 20 per cent loading. The loading continues for 10 years. The loading applies only to premiums for hospital cover, not to ancillary (extras) cover.
* Medicare Levy Surcharge: People whose taxable income is greater than a specified amount (currently $70,000 for singles and $140,000 for couples) and who do not have an adequate level of private hospital cover must pay a 1% surcharge on top of the standard 1.5% Medicare Levy. The rationale is that if the people in this income group are forced to pay more money one way or another, most would choose to purchase hospital insurance with it, with the possibility of a benefit in the event that they need private hospital treatment - rather than pay it in the form of extra tax as well as having to meet their own private hospital costs.
o The Australian government announced in May 2008 that it proposes to increase the thresholds, to $100,000 for singles and $150,000 for families. These changes require legislative approval. A bill to change the law has been introduced but was not passed by the Senate.[22] A changed version was passed on 16 October 2008. There have been criticisms that the changes will cause many people to drop their private health insurance, causing a further burden on the public hospital system, and a rise in premiums for those who stay with the private system. Other commentators believe the effect will be minimal.[23]
* Private Health Insurance Rebate: The government subsidises the premiums for all private health insurance cover, including hospital and ancillary (extras), by 30%, 35% or 40%.
[edit] Canada
Main article: Health care in Canada
Most health insurance in Canada is administered by each province, under the Canada Health Act, which requires all people to have free access to basic health services. Collectively, the public provincial health insurance systems in Canada are frequently referred to as Medicare. Private health insurance is allowed, but the provincial governments allow it only for services that the public health plans do not cover; for example, semi-private or private rooms in hospitals and prescription drug plans. Canadians are free to use private insurance for elective medical services such as laser vision correction surgery, cosmetic surgery, and other non-basic medical procedures. Some 65% of Canadians have some form of supplementary private health insurance; many of them receive it through their employers.[24] Private-sector services not paid for by the government account for nearly 30 percent of total health care spending.[25]
In 2005, the Supreme Court of Quebec ruled, in Chaoulli v. Quebec, that the province's prohibition on private insurance for health care already insured by the provincial plan could constitute an infringement of the right to life and security if there were long wait times for treatment as happened in this case. Certain other provinces have legislation which financially discourages but does not forbid private health insurance in areas covered by the public plans. The ruling has not changed the overall pattern of health insurance across Canada but has spurred on attempts to tackle the core issues of supply and demand and the impact of wait times.[26]
[edit] France
Main article: Health care in France
The French model of health insurance has been ranked by the World Health Organization as the best in the world, because it permits a high quality of care and nearly total patient freedom. The national system of health insurance was instituted in 1945, just after the end of the Second World War. It was a compromise between Gaullist and Communist representatives in the French parliament. The Conservative Gaullists were opposed to a state-run healthcare system, while the Communists were supportive of a complete nationalisation of health care along a British Beveridge model.
The resulting programme was profession-based : all people working were required to pay a portion of their income to a health insurance fund, which mutualised the risk of illness, and which reimbursed medical expenses at varying rates. Children and spouses of insured people were eligible for benefits, as well. Each fund was free to manage its own budget and reimburse medical expenses at the rate it saw fit.
The government has two responsibilities in this system.
* The first government responsibility is the fixing of the rate at which medical expenses should be negotiated, and it does this in two ways: The Ministry of Health directly negotiates prices of medicine with the manufacturers, based on the average price of sale observed in neighboring countries. A board of doctors and experts decides if the medicine provides a valuable enough medical benefit to be reimbursed (note that most medicine is reimbursed, including homeopathy). In parallel, the government fixes the reimbursment rate for medical services : this means that a doctor is free to charge the fee that he wishes for a consultation or an examination, but the social security system will only reimburse it at a pre-set rate. These tariffs are set annually through negotiation with doctors' representative organisations.
* The second government responsibility is oversight of the health-insurance funds, to ensure that they are correctly managing the sums they receive, and to ensure oversight of the public hospital network.
Today, this system is more-or-less intact. All citizens and legal foreign residents of France are covered by one of these mandatory programs, which continue to be funded by worker participation. However, since 1945, a number of major changes have been introduced. Firstly, the different health-care funds (there are five : General, Independent, Agricultural, Student, Public Servants) now all reimburse at the same rate. Secondly, since 2000, the government now provides health care to those who are not covered by a mandatory regime (those who have never worked and who are not students, meaning the very rich or the very poor). This regime, unlike the worker-financed ones, is financed via general taxation and reimburses at a higher rate than the profession-based system for those who cannot afford to make up the difference. Finally, to counter the rise in health-care costs, the government has installed two plans, (in 2004 and 2006), which require insured people to declare a referring doctor in order to be fully reimbursed for specalist visits, and which installed a mandatory co-pay of 1 € (about $1.45) for a doctor visit, 0,50 € (about 80 ¢) for each box of medicine prescribed, and a fee of 16-18 € (20-25 $) per day for hospital stays and for expensive procedures.
An important element of the French insurance system is solidarity : the more ill a person becomes, the less they pay. This means that for people with serious or chronic illnesses, the insurance system reimburses them 100 % of expenses, and waives their co-pay charges.
Finally, for fees that the mandatory system does not cover, there is a large range of private complementary insurance plans available. The market for these programs is very competitive, and often subsidised by the employer, which means that premiums are usually modest. 85% of French people benefit from complementary private health insurance.
[27][28]
[edit] Netherlands
Main article: Health care in the Netherlands
In 2006, a new system of health insurance came into force in the Netherlands. This new system avoids the two pitfalls of adverse selection and moral hazard associated with traditional forms of health insurance by using a combination of regulation and an insurance equalization pool. Moral hazard is avoided by mandating that insurance companies provide at least one policy which meets a government set minimum standard level of coverage, and all adult residents are obliged by law to purchase this coverage from an insurance company of their choice. All insurance companies receive funds from the equalization pool to help cover the cost of this government-mandated coverage. This pool is run by a regulator which collects salary-based contributions from employers, which make up about 50% of all health care funding, and funding from the government to cover people who cannot afford health care, which makes up an additional 5%.
The remaining 45% of health care funding comes from insurance premiums paid by the public, for which companies compete on price, though the variation between the various competing insurers is only about 5%. However, insurance companies are free to sell additional policies to provide coverage beyond the national minimum. These policies do not receive funding from the equalization pool, but cover additional treatments, such as dental procedures and physiotherapy, which are not paid for by the mandatory policy.
Funding from the equalization pool is distributed to insurance companies for each person they insure under the required policy. However, high-risk individuals get more from the pool, and low-income persons and children under 18 have their insurance paid for entirely. Because of this, insurance companies no longer find insuring high risk individuals an unappealing proposition, avoiding the potential problem of adverse selection.
Insurance companies are not allowed to have co-payments, caps, or deductibles, or to deny coverage to any person applying for a policy, or to charge anything other than their nationally set and published standard premiums. Therefore, every person buying insurance will pay the same price as everyone else buying the same policy, and every person will get at least the minimum level of coverage.
[edit] United Kingdom
Main article: National Health Service
The UK's National Health Service (NHS) is a publicly funded healthcare system that provides coverage to everyone normally resident in the UK. It is not strictly an insurance system because (a) there are no premiums collected, (b) costs are not charged at the patient level and (c) costs are not pre-paid from a pool. However, it does achieve the main aim of insurance which is to spread financial risk arising from ill-health. The costs of running the NHS (est. £104 billion in 2007-8)[29] are met directly from general taxation. The NHS provides the majority of health care in the UK, including primary care, in-patient care, long-term health care, ophthalmology and dentistry.
Private health care has continued parallel to the NHS, paid for largely by private insurance, but it is used by less than 8% of the population, and generally as a top-up to NHS services. There are many treatments that the private sector does not provide. For example, health insurance on pregnancy is generally not covered or covered with restricting clauses.[30] One of the major insurers, BUPA, excludes many forms of treatment and care that most people will need during their lifetime or specialist care most of which are freely available from the NHS. These include:-
ageing, menopause and puberty; AIDS/HIV; allergies or allergic disorders; birth control, conception, sexual problems and sex changes; chronic conditions; complications from excluded or restricted conditions/ treatment; convalescence, rehabilitation and general nursing care ; cosmetic, reconstructive or weight loss treatment; deafness; dental/oral treatment (such as fillings, gum disease, jaw shrinkage, etc); dialysis; drugs and dressings for out-patient or take-home use† ; experimental drugs and treatment; eyesight; HRT and bone densitometry; learning difficulties, behavioural and developmental problems; overseas treatment and repatriation; physical aids and devices; pre-existing or special conditions; pregnancy and childbirth; screening and preventive treatment; sleep problems and disorders; speech disorders; temporary relief of symptoms[31] († = except in exceptional circumstances)
BUPA's competitors include, among others, AXA, Aviva, Groupama Healthcare and Pru Health.
Recently the private sector has been used to increase NHS capacity despite a large proportion of the British public opposing such involvement.[32]. According to the World Health Organization, government funding covered 86% of overall health care expenditures in the UK as of 2004, with private expenditures covering the remaining 14%.[33]
[edit] United States
Main articles: Health insurance in the United States and Health care in the United States
The US market-based health care system relies heavily on private and not-for-profit health insurance, which is the primary source of coverage for most Americans. According to the United States Census Bureau, approximately 84% of Americans have health insurance; some 60% obtain it through an employer, while about 9% purchase it directly. Various government agencies provide coverage to about 27% of Americans (there is some overlap in these figures).[34]
Public programs provide the primary source of coverage for most seniors and for low-income children and families who meet certain eligibility requirements. The primary public programs are Medicare, a federal social insurance program for seniors and certain disabled individuals, Medicaid, funded jointly by the federal government and states but administered at the state level, which covers certain very low income children and their families, and SCHIP, also a federal-state partnership that serves certain children and families who do not qualify for Medicaid but who cannot afford private coverage. Other public programs include military health benefits provided through TRICARE and the Veterans Health Administration and benefits provided through the Indian Health Service. Some states have additional programs for low-income individuals.[35]
In 2006, there were 47 million people in the United States (16% of the population) who were without health insurance for at least part of that year.[34] About 37% of the uninsured live in households with an income over $50,000.[34]
In 2004, US health insurers directly employed almost 470,000 people at an average salary of $61,409.[36] (As of the fourth quarter of 2007, the total US labor force stood at 153.6 million, of whom 146.3 million were employed. Employment related to all forms of insurance totaled 2.3 million.[37] Mean annual earnings for full-time civilian workers as of June 2006 were $41,231; median earnings were $33,634.)[38] The insurance industry also represents a significant lobbying group in the US. For 2008 insurance was the 8th among industries in political contributions to members of Congress, giving $28,654,121, of which 51% was given to Democrats and 49% to Republicans, with the top recipient of insurance industry contributions being Senator John McCain (R-AZ).[39] The leading contributor from the insurance industry — as measured by total political contributions — was AFLAC, Inc., which contributed $907,150 in 2007.[40].
Comparison
The Commonwealth Fund, in its annual survey, "Mirror, Mirror on the Wall", compares the performance of the health care systems in Australia, New Zealand, the United Kingdom, Germany, Canada and the U.S. Its 2007 study found that, although the U.S. system is the most expensive, it consistently under-performs compared to the other countries.[21] One difference between the U.S. and the other countries in the study is that the U.S. is the only country without universal health insurance coverage.
Other factors affecting insurance price
A recent study by PriceWaterhouseCoopers examining the drivers of rising health care costs in the US pointed to increased utilization created by increased consumer demand, new treatments, and more intensive diagnostic testing, as the most significant driver.[20] People in developed countries are living longer. The population of those countries is aging, and a larger group of senior citizens requires more intensive medical care than a young healthier population. Advances in medicine and medical technology can also increase the cost of medical treatment. Lifestyle-related factors can increase utilization and therefore insurance prices, such as: increases in obesity caused by insufficient exercise and unhealthy food choices; excessive alcohol use, smoking, and use of street drugs. Other factors noted by the PWC study included the movement to broader-access plans, higher-priced technologies, and cost-shifting from Medicaid and the uninsured to private payers.
Moral hazard
Moral hazard occurs when an insurer and a consumer enter into a contract under symmetric information, but one party takes action, not taken into account in the contract, which changes the value of the insurance. A common example of moral hazard is third-party payment—when the parties involved in making a decision are not responsible for bearing costs arising from the decision. An example is where doctors and insured patients agree to extra tests which may or may not be necessary. Doctors benefit by avoiding possible malpractice suits, and patients benefit by gaining increased certainty of their medical condition. The cost of these extra tests is borne by the insurance company, which may have had little say in the decision. Co-payments, deductibles, and less generous insurance for services with more elastic demand attempt to combat moral hazard, as they hold the consumer responsible.
Adverse selection
Insurance companies use the term "adverse selection" to describe the tendency for only those who will benefit from insurance to buy it. Specifically when talking about health insurance, unhealthy people are more likely to purchase health insurance because they anticipate large medical bills. On the other side, people who consider themselves to be reasonably healthy may decide that medical insurance is an unnecessary expense; if they see the doctor once a year and it costs $250, that's much better than making monthly insurance payments of $40. (example figures).
The fundamental concept of insurance is that it balances costs across a large, random sample of individuals (see risk pool). For instance, an insurance company has a pool of 1000 randomly selected subscribers, each paying $100 per month. One person becomes very ill while the others stay healthy, allowing the insurance company to use the money paid by the healthy people to pay for the treatment costs of the sick person. However, when the pool is self-selecting rather than random, as is the case with individuals seeking to purchase health insurance directly, adverse selection is a greater concern.[12] A disproportionate share of health care spending is attributable to individuals with high health care costs. In the US the 1% of the population with the highest spending accounted for 27% of aggregate health care spending in 1996. The highest-spending 5% of the population accounted for more than half of all spending. These patterns were stable through the 1970s and 1980s, and some data suggest that they may have been typical of the mid-to-early 20th century as well.[13][14] A few individuals have extremely high medical expenses, in extreme cases totaling a half million dollars or more.[15] Adverse selection could leave an insurance company with primarily sick subscribers and no way to balance out the cost of their medical expenses with a large number of healthy subscribers.
Because of adverse selection, insurance companies employ medical underwriting, using a patient's medical history to screen out those whose pre-existing medical conditions pose too great a risk for the risk pool. Before buying health insurance, a person typically fills out a comprehensive medical history form that asks whether the person smokes, how much the person weighs, whether the person has been treated for any of a long list of diseases and so on. In general, those who present large financial burdens are denied coverage or charged high premiums to compensate.[16] One large US industry survey found that roughly 13 percent of applicants for comprehensive, individually purchased health insurance who went through the medical underwriting in 2004 were denied coverage. Declination rates increased significantly with age, rising from 5 percent for individuals 18 and under to just under a third for individuals aged 60 to 64.[17] Among those who were offered coverage, the study found that 76% received offers at standard premium rates, and 22% were offered higher rates.[18] On the other side, applicants can get discounts if they do not smoke and are healthy.[19]
The fundamental concept of insurance is that it balances costs across a large, random sample of individuals (see risk pool). For instance, an insurance company has a pool of 1000 randomly selected subscribers, each paying $100 per month. One person becomes very ill while the others stay healthy, allowing the insurance company to use the money paid by the healthy people to pay for the treatment costs of the sick person. However, when the pool is self-selecting rather than random, as is the case with individuals seeking to purchase health insurance directly, adverse selection is a greater concern.[12] A disproportionate share of health care spending is attributable to individuals with high health care costs. In the US the 1% of the population with the highest spending accounted for 27% of aggregate health care spending in 1996. The highest-spending 5% of the population accounted for more than half of all spending. These patterns were stable through the 1970s and 1980s, and some data suggest that they may have been typical of the mid-to-early 20th century as well.[13][14] A few individuals have extremely high medical expenses, in extreme cases totaling a half million dollars or more.[15] Adverse selection could leave an insurance company with primarily sick subscribers and no way to balance out the cost of their medical expenses with a large number of healthy subscribers.
Because of adverse selection, insurance companies employ medical underwriting, using a patient's medical history to screen out those whose pre-existing medical conditions pose too great a risk for the risk pool. Before buying health insurance, a person typically fills out a comprehensive medical history form that asks whether the person smokes, how much the person weighs, whether the person has been treated for any of a long list of diseases and so on. In general, those who present large financial burdens are denied coverage or charged high premiums to compensate.[16] One large US industry survey found that roughly 13 percent of applicants for comprehensive, individually purchased health insurance who went through the medical underwriting in 2004 were denied coverage. Declination rates increased significantly with age, rising from 5 percent for individuals 18 and under to just under a third for individuals aged 60 to 64.[17] Among those who were offered coverage, the study found that 76% received offers at standard premium rates, and 22% were offered higher rates.[18] On the other side, applicants can get discounts if they do not smoke and are healthy.[19]
Inherent problems with multiple insurance funds and optional insurance
The basic concept of insurance is population solidarity. There are inherent risks in a population but the population absorbs the cost of risks to an individual by spreading the impact of incurred costs amongst the insured population. However, if the population is split into insured and uninsured groups, or into selectively groups (as with private insurance with pre-insurance selection either by the insurance company or the insured) the concept of population solidarity breaks down. Insurance systems must then typically deal with two inherent challenges: adverse selection and ex-post moral hazard.
Some national systems with compulsory insurance utilize systems such as risk equalization and community rating to overcome these inherent problems. Proponents of single-payer health care in the United States aim to provide the population of the country with health care from a single fund and thus avoid problems and costs associated with adverse selection, moral hazard, and private profiteering from
Some national systems with compulsory insurance utilize systems such as risk equalization and community rating to overcome these inherent problems. Proponents of single-payer health care in the United States aim to provide the population of the country with health care from a single fund and thus avoid problems and costs associated with adverse selection, moral hazard, and private profiteering from
Comprehensive vs. scheduled
Comprehensive health insurance pays a percentage of the cost of hospital and physician charges after a deductible (usually applies to hospital charges) or a co-pay (usually applies to physician charges, but may apply to some hospital services) is met by the insured. These plans are generally expensive because of the high potential benefit payout — $1,000,000 to 5,000,000 is common — and because of the vast array of covered benefits.[10]
Scheduled health insurance plans are not meant to replace a traditional comprehensive health insurance plans and are more of a basic policy providing access to day-to-day health care such as going to the doctor or getting a prescription drug. In recent years, these plans have taken the name mini-med plans or association plans. These plans may provide benefits for hospitalization and surgical, but these benefits will be limited. Scheduled plans are not meant to be effective for catastrophic events. These plans cost much less than comprehensive health insurance. They generally pay limited benefits amounts directly to the service provider, and payments are based upon the plan's "schedule of benefits". Annual benefits maximums for a typical scheduled health insurance plan may range from $1,000 to $25,000
Scheduled health insurance plans are not meant to replace a traditional comprehensive health insurance plans and are more of a basic policy providing access to day-to-day health care such as going to the doctor or getting a prescription drug. In recent years, these plans have taken the name mini-med plans or association plans. These plans may provide benefits for hospitalization and surgical, but these benefits will be limited. Scheduled plans are not meant to be effective for catastrophic events. These plans cost much less than comprehensive health insurance. They generally pay limited benefits amounts directly to the service provider, and payments are based upon the plan's "schedule of benefits". Annual benefits maximums for a typical scheduled health insurance plan may range from $1,000 to $25,000
Health plan vs. health insurance
Historically, HMOs tended to use the term "health plan", while commercial insurance companies used the term "health insurance". A health plan can also refer to a subscription-based medical care arrangement offered through HMOs, preferred provider organizations, or point of service plans. These plans are similar to pre-paid dental, pre-paid legal, and pre-paid vision plans. Pre-paid health plans typically pay for a fixed number of services (for instance, $300 in preventive care, a certain number of days of hospice care or care in a skilled nursing facility, a fixed number of home health visits, a fixed number of spinal manipulation charges, etc.) The services offered are usually at the discretion of a utilization review nurse who is often contracted through the managed care entity providing the subscription health plan. This determination may be made either prior to or after hospital admission (concurrent utilization review).
How it works
A health insurance policy is a contract between an insurance company and an individual or his sponsor (e.g. an employer). The contract can be renewable annually or monthly. The type and amount of health care costs that will be covered by the health insurance company are specified in advance, in the member contract or "Evidence of Coverage" booklet. The individual insurered person's obligations may take several forms[7]:
* Premium: The amount the policy-holder or his sponsor (e.g. an employer) pays to the health plan each month to purchase health coverage.
* Deductible: The amount that the insured must pay out-of-pocket before the health insurer pays its share. For example, a policy-holder might have to pay a $500 deductible per year, before any of their health care is covered by the health insurer. It may take several doctor's visits or prescription refills before the insured person reaches the deductible and the insurance company starts to pay for care.
* Copayment: The amount that the insurered person must pay out of pocket before the health insurer pays for a particular visit or service. For example, an insured person might pay a $45 copayment for a doctor's visit, or to obtain a prescription. A copayment must be paid each time a particular service is obtained.
* Coinsurance: Instead of, or in addition to, paying a fixed amount up front (a copayment), the co-insrance is a percentage of the total cost that insured person may also pay. For example, the member might have to pay 20% of the cost of a surgery over and above a co-payment, while the insurance company pays the other 80%. If there is an upper limit on coinsurance, the policy-holder could end up owing very little, or a great deal, depending on the actual costs of the services they obtain.
* Exclusions: Not all services are covered. The insureed person is generally expected to pay the full cost of non-covered services out of their own pocket.
* Coverage limits: Some health insurance policies only pay for health care up to a certain dollar amount. The insured person may be expected to pay any charges in excess of the health plan's maximum payment for a specific service. In addition, some insurance company schemes have annual or lifetime coverage maximums. In these cases, the health plan will stop payment when they reach the benefit maximum, and the policy-holder must pay all remaining costs.
* Out-of-pocket maximums: Similar to coverage limits, except that in this case, the insured person's payment obligation ends when they reach the out-of-pocket maximum, and the health company pays all further covered costs. Out-of-pocket maximums can be limited to a specific benefit category (such as prescription drugs) or can apply to all coverage provided during a specific benefit year.
* Capitation: An amount paid by an insurer to a health care provider, for which the provider agrees to treat all members of the insurer.
* In-Network Provider: (U.S. term) A health care provider on a list of providers preselected by the insurer. The insurer will offer discounted coinsurance or copayments, or additional benefits, to a plan member to see an in-network provider. Generally, providers in network are providers who have a contract with the insurer to accept rates further discounted from the "usual and customary" charges the insurer pays to out-of-network providers.
* Prior Authorization: A certification or authorization that an insurer provides prior to medical service occuring. Obtaining an authorization means that the insurer is obligated to pay for the service, assume it matches what was authorized. Many smaller, routine services do not require authorization[8]
* Explanation of Benefits: A document sent by an insurer to a patient explaining what was covered for a medical service, and how they arrived at the payment amount and patient responsibility amount[9]
Prescription drug plans are a form of insurance offered through some employer benefit plans in the US, where the patient pays a copayment and the prescription drug insurance part or all of the balance for drugs covered in the formulary of the plan.
Some, if not most, health care providers in the United States will agree to bill the insurance company if patients are willing to sign an agreement that they will be responsible for the amount that the insurance company doesn't pay. The insurance company pays out of network providers according to "reasonable and customary" charges, which may be less than the provider's usual fee. The provider may also have a separate contract with the insurer to accept what amounts to a discounted rate or capitation to the provider's standard charges. It generally costs the patient less to use an in-network provider.
* Premium: The amount the policy-holder or his sponsor (e.g. an employer) pays to the health plan each month to purchase health coverage.
* Deductible: The amount that the insured must pay out-of-pocket before the health insurer pays its share. For example, a policy-holder might have to pay a $500 deductible per year, before any of their health care is covered by the health insurer. It may take several doctor's visits or prescription refills before the insured person reaches the deductible and the insurance company starts to pay for care.
* Copayment: The amount that the insurered person must pay out of pocket before the health insurer pays for a particular visit or service. For example, an insured person might pay a $45 copayment for a doctor's visit, or to obtain a prescription. A copayment must be paid each time a particular service is obtained.
* Coinsurance: Instead of, or in addition to, paying a fixed amount up front (a copayment), the co-insrance is a percentage of the total cost that insured person may also pay. For example, the member might have to pay 20% of the cost of a surgery over and above a co-payment, while the insurance company pays the other 80%. If there is an upper limit on coinsurance, the policy-holder could end up owing very little, or a great deal, depending on the actual costs of the services they obtain.
* Exclusions: Not all services are covered. The insureed person is generally expected to pay the full cost of non-covered services out of their own pocket.
* Coverage limits: Some health insurance policies only pay for health care up to a certain dollar amount. The insured person may be expected to pay any charges in excess of the health plan's maximum payment for a specific service. In addition, some insurance company schemes have annual or lifetime coverage maximums. In these cases, the health plan will stop payment when they reach the benefit maximum, and the policy-holder must pay all remaining costs.
* Out-of-pocket maximums: Similar to coverage limits, except that in this case, the insured person's payment obligation ends when they reach the out-of-pocket maximum, and the health company pays all further covered costs. Out-of-pocket maximums can be limited to a specific benefit category (such as prescription drugs) or can apply to all coverage provided during a specific benefit year.
* Capitation: An amount paid by an insurer to a health care provider, for which the provider agrees to treat all members of the insurer.
* In-Network Provider: (U.S. term) A health care provider on a list of providers preselected by the insurer. The insurer will offer discounted coinsurance or copayments, or additional benefits, to a plan member to see an in-network provider. Generally, providers in network are providers who have a contract with the insurer to accept rates further discounted from the "usual and customary" charges the insurer pays to out-of-network providers.
* Prior Authorization: A certification or authorization that an insurer provides prior to medical service occuring. Obtaining an authorization means that the insurer is obligated to pay for the service, assume it matches what was authorized. Many smaller, routine services do not require authorization[8]
* Explanation of Benefits: A document sent by an insurer to a patient explaining what was covered for a medical service, and how they arrived at the payment amount and patient responsibility amount[9]
Prescription drug plans are a form of insurance offered through some employer benefit plans in the US, where the patient pays a copayment and the prescription drug insurance part or all of the balance for drugs covered in the formulary of the plan.
Some, if not most, health care providers in the United States will agree to bill the insurance company if patients are willing to sign an agreement that they will be responsible for the amount that the insurance company doesn't pay. The insurance company pays out of network providers according to "reasonable and customary" charges, which may be less than the provider's usual fee. The provider may also have a separate contract with the insurer to accept what amounts to a discounted rate or capitation to the provider's standard charges. It generally costs the patient less to use an in-network provider.
History and evolution
The concept of health insurance was proposed in 1694 by Hugh the Elder Chamberlen from the Peter Chamberlen family. In the late 19th century, "accident insurance" began to be available, which operated much like modern disability insurance.[2].This payment model continued until the start of the 20th century in some jurisdictions (like California), where all laws regulating health insurance actually referred to disability insurance.[3]
Accident insurance was first offered in the United States by the Franklin Health Assurance Company of Massachusetts. This firm, founded in 1850, offered insurance against injuries arising from railroad and steamboat accidents. Sixty organizations were offering accident insurance in the US by 1866, but the industry consolidated rapidly soon thereafter. While there were earlier experiments, the origins of sickness coverage in the US effectively date from 1890. The first employer-sponsored group disability policy was issued in 1911.[4]
Before the development of medical expense insurance, patients were expected to pay all other health care costs out of their own pockets, under what is known as the fee-for-service business model. During the middle to late 20th century, traditional disability insurance evolved into modern health insurance programs. Today, most comprehensive private health insurance programs cover the cost of routine, preventive, and emergency health care procedures, and also most prescription drugs, but this was not always the case.
Hospital and medical expense policies were introduced during the first half of the 20th century. During the 1920s, individual hospitals began offering services to individuals on a pre-paid basis, eventually leading to the development of Blue Cross organizations.[4] The predecessors of today's Health Maintenance Organizations (HMOs) originated beginning in 1929, through the 1930s and on during World War II.
Accident insurance was first offered in the United States by the Franklin Health Assurance Company of Massachusetts. This firm, founded in 1850, offered insurance against injuries arising from railroad and steamboat accidents. Sixty organizations were offering accident insurance in the US by 1866, but the industry consolidated rapidly soon thereafter. While there were earlier experiments, the origins of sickness coverage in the US effectively date from 1890. The first employer-sponsored group disability policy was issued in 1911.[4]
Before the development of medical expense insurance, patients were expected to pay all other health care costs out of their own pockets, under what is known as the fee-for-service business model. During the middle to late 20th century, traditional disability insurance evolved into modern health insurance programs. Today, most comprehensive private health insurance programs cover the cost of routine, preventive, and emergency health care procedures, and also most prescription drugs, but this was not always the case.
Hospital and medical expense policies were introduced during the first half of the 20th century. During the 1920s, individual hospitals began offering services to individuals on a pre-paid basis, eventually leading to the development of Blue Cross organizations.[4] The predecessors of today's Health Maintenance Organizations (HMOs) originated beginning in 1929, through the 1930s and on during World War II.
Health insurance
The term health insurance is generally used to describe a form of insurance that pays for medical expenses. It is sometimes used more broadly to include insurance covering disability or long-term nursing or custodial care needs. It may be provided through a government-sponsored social insurance program, or from private insurance companies. It may be purchased on a group basis (e.g., by a firm to cover its employees) or purchased by individual consumers. In each case, the covered groups or individuals pay premiums or taxes to help protect themselves from high or unexpected healthcare expenses. Similar benefits paying for medical expenses may also be provided through social welfare programs funded by the government.
By estimating the overall risk of healthcare expenses, a routine finance structure (such as a monthly premium or annual tax) can be developed, ensuring that money is available to pay for the healthcare benefits specified in the insurance agreement. The benefit is administered by a central organization, most often either a government agency or a private or not-for-profit entity operating a health plan.[1]
By estimating the overall risk of healthcare expenses, a routine finance structure (such as a monthly premium or annual tax) can be developed, ensuring that money is available to pay for the healthcare benefits specified in the insurance agreement. The benefit is administered by a central organization, most often either a government agency or a private or not-for-profit entity operating a health plan.[1]
Glossary
'Combined ratio' = loss ratio + expense ratio + commission 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 written premium. A lower number indicates a better return on the amount of capital placed at risk by an insurer.
Criticism of insurance companies
Some people believe that modern insurance companies are money-making businesses which have little interest in insurance.[citation needed] They argue that the purpose of insurance is to spread risk so the reluctance of insurance companies to take on high-risk cases (e.g. houses in areas subject to flooding, or young drivers) runs counter to the principle of insurance.[citation needed]
Other criticisms include:
* Insurance policies contain too many exclusion clauses. For example, some house insurance policies do not cover damage to garden walls.[citation needed]
* Many insurance companies now use call centres and staff attempt to answer questions by reading from a script.[citation needed] It is difficult to speak to anybody with expert knowledge.[citation needed] While policyholders find their premium payments decrease when dealing with companies who sacrifice the use of trained insurance agents, they also risk greater financial loss due to inadequate coverage protection.[citation needed] Those companies who invest in educated insurance agents provide a valued service to the community. Policyholders who work with knowledgeable insurance agents are more likely to identify needs, evaluate options, purchase sufficient insurance protection, and minimize the risk of heavy financial loss for themselves and their family.
Other criticisms include:
* Insurance policies contain too many exclusion clauses. For example, some house insurance policies do not cover damage to garden walls.[citation needed]
* Many insurance companies now use call centres and staff attempt to answer questions by reading from a script.[citation needed] It is difficult to speak to anybody with expert knowledge.[citation needed] While policyholders find their premium payments decrease when dealing with companies who sacrifice the use of trained insurance agents, they also risk greater financial loss due to inadequate coverage protection.[citation needed] Those companies who invest in educated insurance agents provide a valued service to the community. Policyholders who work with knowledgeable insurance agents are more likely to identify needs, evaluate options, purchase sufficient insurance protection, and minimize the risk of heavy financial loss for themselves and their family.
The insurance industry and rent seeking
Certain insurance products and practices have been described as rent seeking by critics.[citation needed] That is, some insurance products or practices are useful primarily because of legal benefits, such as reducing taxes, as opposed to providing protection against risks of adverse events. Under United States tax law, for example, most owners of variable annuities and variable life insurance can invest their premium payments in the stock market and defer or eliminate paying any taxes on their investments until withdrawals are made. Sometimes this tax deferral is the only reason people use these products.[citation needed] Another example is the legal infrastructure which allows life insurance to be held in an irrevocable trust which is used to pay an estate tax while the proceeds themselves are immune from the estate tax.
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 U.S. auto insurance company, Progressive Auto Insurance (U.S. Patent 5,797,134 ) and a Spanish independent inventor, Salvador Minguijon Perez (EP patent 0700009).
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 issued has steadily risen from 15 in 2002 to 44 in 2006. [17]
Inventors can now have their insurance U.S. patent applications reviewed by the public in the Peer to Patent program.[18] The first insurance patent application to be posted was US2009005522 “Risk assessment company”. It was posted on March 6, 2009. This patent application describes a method for increasing the ease of changing insurance companies.[
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 U.S. auto insurance company, Progressive Auto Insurance (U.S. Patent 5,797,134 ) and a Spanish independent inventor, Salvador Minguijon Perez (EP patent 0700009).
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 issued has steadily risen from 15 in 2002 to 44 in 2006. [17]
Inventors can now have their insurance U.S. patent applications reviewed by the public in the Peer to Patent program.[18] The first insurance patent application to be posted was US2009005522 “Risk assessment company”. It was posted on March 6, 2009. This patent application describes a method for increasing the ease of changing insurance companies.[
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.[15]
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.[16]
In determining premiums and premium rate structures, insurers consider quantifiable factors, including location, credit scores, gender, occupation, marital status, and education level. However, the use of such factors is often considered to be unfair or unlawfully discriminatory, and the reaction against this practice has in some instances led to political disputes about the ways in which insurers determine premiums and regulatory intervention to limit the factors used.
An insurance underwriter's job is to evaluate a given risk as to the likelihood that a loss will occur. Any factor that causes a greater likelihood of loss should theoretically be charged a higher rate. This basic principle of insurance must be followed if insurance companies are to remain solvent.[citation needed] Thus, "discrimination" against (i.e., negative differential treatment of) potential insureds in the risk evaluation and premium-setting process is a necessary by-product of the fundamentals of insurance underwriting. For instance, insurers charge older people significantly higher premiums than they charge younger people for term life insurance. Older people are thus treated differently than younger people (i.e., a distinction is made, discrimination occurs). The rationale for the differential treatment goes to the heart of the risk a life insurer takes: Old people are likely to die sooner than young people, so the risk of loss (the insured's death) is greater in any given period of time and therefore the risk premium must be higher to cover the greater risk. However, treating insureds differently when there is no actuarially sound reason for doing so is unlawful discrimination.
What is often missing from the debate is that prohibiting the use of legitimate, actuarially sound factors means that an insufficient amount is being charged for a given risk, and there is thus a deficit in the system.[citation needed] The failure to address the deficit may mean insolvency and hardship for all of a company's insureds.[citation needed] The options for addressing the deficit seem to be the following: Charge the deficit to the other policyholders or charge it to the government (i.e., externalize outside of the company to society at large)
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.[16]
In determining premiums and premium rate structures, insurers consider quantifiable factors, including location, credit scores, gender, occupation, marital status, and education level. However, the use of such factors is often considered to be unfair or unlawfully discriminatory, and the reaction against this practice has in some instances led to political disputes about the ways in which insurers determine premiums and regulatory intervention to limit the factors used.
An insurance underwriter's job is to evaluate a given risk as to the likelihood that a loss will occur. Any factor that causes a greater likelihood of loss should theoretically be charged a higher rate. This basic principle of insurance must be followed if insurance companies are to remain solvent.[citation needed] Thus, "discrimination" against (i.e., negative differential treatment of) potential insureds in the risk evaluation and premium-setting process is a necessary by-product of the fundamentals of insurance underwriting. For instance, insurers charge older people significantly higher premiums than they charge younger people for term life insurance. Older people are thus treated differently than younger people (i.e., a distinction is made, discrimination occurs). The rationale for the differential treatment goes to the heart of the risk a life insurer takes: Old people are likely to die sooner than young people, so the risk of loss (the insured's death) is greater in any given period of time and therefore the risk premium must be higher to cover the greater risk. However, treating insureds differently when there is no actuarially sound reason for doing so is unlawful discrimination.
What is often missing from the debate is that prohibiting the use of legitimate, actuarially sound factors means that an insufficient amount is being charged for a given risk, and there is thus a deficit in the system.[citation needed] The failure to address the deficit may mean insolvency and hardship for all of a company's insureds.[citation needed] The options for addressing the deficit seem to be the following: Charge the deficit to the other policyholders or charge it to the government (i.e., externalize outside of the company to society at large)
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 the hard way that many courts will not enforce policies against insureds when the judges themselves cannot understand what the policies are saying.
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, it should be noted that in the vast majority of cases a broker's compensation comes in the form of a commission as a percentage of the insurance premium, creating a conflict of interest in that the broker's financial interest is tilted towards encouraging an insured to purchase more insurance than might be necessary at a higher price. A broker generally holds contracts with many insurers, thereby allowing the broker to "shop" the market for the best rates and coverage possible.
Insurance may also be purchased through an agent. Unlike a broker, who represents the policyholder, an agent represents the insurance company from whom the policyholder buys. An agent can represent more than one company.
An independent insurance consultant advises insureds on a fee-for-service retainer, similar to an attorney, and thus offers completely independent advice, free of the financial conflict of interest of brokers and/or agents. However, such a consultant must still work through brokers and/or agents in order to secure coverage for their clients.
For example, most insurance policies in the English language today have been carefully drafted in plain English; the industry learned the hard way that many courts will not enforce policies against insureds when the judges themselves cannot understand what the policies are saying.
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, it should be noted that in the vast majority of cases a broker's compensation comes in the form of a commission as a percentage of the insurance premium, creating a conflict of interest in that the broker's financial interest is tilted towards encouraging an insured to purchase more insurance than might be necessary at a higher price. A broker generally holds contracts with many insurers, thereby allowing the broker to "shop" the market for the best rates and coverage possible.
Insurance may also be purchased through an agent. Unlike a broker, who represents the policyholder, an agent represents the insurance company from whom the policyholder buys. An agent can represent more than one company.
An independent insurance consultant advises insureds on a fee-for-service retainer, similar to an attorney, and thus offers completely independent advice, free of the financial conflict of interest of brokers and/or agents. However, such a consultant must still work through brokers and/or agents in order to secure coverage for their clients.
Controversies [edit] Insurance insulates too much
By creating a "security blanket" for its insureds, an insurance company may inadvertently find that its insureds may not be as risk-averse as they might otherwise be (since, by definition, the insured has transferred the risk to the insurer,) a concept known as moral hazard. To reduce their own financial exposure, insurance companies have contractual clauses that mitigate their obligation to provide coverage if the insured engages in behavior that grossly magnifies their risk of loss or liability.
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 want 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.
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 want 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.
Global insurance industry
Global insurance premiums grew by 11% in 2007 (or 3.3% in real terms) to reach $4.1 trillion. The macro-economic environment was characterised by slower economic growth in 2007 and rising inflation. Profitability improved in life insurance and fell slighlty in the non-life sector during the year. Life insurance premiums grew by 12.6%, accelerating in the advanced economies with the exception of Japan and Continental Europe. Non-life insurance premiums grew by 7.6% during the year. Figures for premium income are not yet available for 2008, but the insurance industry is likely to see a slowdown in new business and falling investment revenue.
Advanced economies account for the bulk of global insurance. With premium income of $1,681bn, Europe was the most important region, followed by North America ($1,330bn) and Asia ($814bn). The top four countries accounted for nearly 60% of premiums in 2007. The US and UK alone accounted for 42% of world insurance, much higher than their 7% share of the global population. Emerging markets accounted for over 85% of the world’s population but generated only around 10% of premiums.
Advanced economies account for the bulk of global insurance. With premium income of $1,681bn, Europe was the most important region, followed by North America ($1,330bn) and Asia ($814bn). The top four countries accounted for nearly 60% of premiums in 2007. The US and UK alone accounted for 42% of world insurance, much higher than their 7% share of the global population. Emerging markets accounted for over 85% of the world’s population but generated only around 10% of premiums.
Insurance companies
Insurance companies may be classified into two groups:
* Life insurance companies, which sell life insurance, annuities and pensions products.
* Non-life, General, or Property/Casualty insurance companies, which sell other types of insurance.
General insurance companies can be further divided into these sub categories.
* Standard Lines
* Excess Lines
In most countries, life and non-life insurers are subject to different regulatory regimes and different tax and accounting rules. The main reason for the distinction between the two types of company is that life, annuity, and pension business is very long-term in nature — coverage for life assurance or a pension can cover risks over many decades. By contrast, non-life insurance cover usually covers a shorter period, such as one year.
In the United States, standard line insurance companies are "mainstream" insurers. These are the companies that typically insure autos, homes or businesses. They use pattern or "cookie-cutter" policies without variation from one person to the next. They usually have lower premiums than excess lines and can sell directly to individuals. They are regulated by state laws that can restrict the amount they can charge for insurance policies.
Excess line insurance companies (aka Excess and Surplus) typically insure risks not covered by the standard lines market. They are broadly referred as being all insurance placed with non-admitted insurers. Non-admitted insurers are not licensed in the states where the risks are located. These companies have more flexibility and can react faster than standard insurance companies because they are not required to file rates and forms as the "admitted" carriers do. However, they still have substantial regulatory requirements placed upon them. State laws generally require insurance placed with surplus line agents and brokers not to be available through standard licensed insurers.
Insurance companies are generally classified as either mutual or stock companies. Mutual companies are owned by the policyholders, while stockholders (who may or may not own policies) own stock 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. Other possible forms for an insurance company include reciprocals, in which policyholders 'reciprocate' in sharing risks, and Lloyds organizations.
Insurance companies are rated by various agencies such as A. M. Best. The ratings include the company's financial strength, which measures its ability to pay claims. It also rates financial instruments issued by the insurance company, such as bonds, notes, and securitization products.
Reinsurance companies are insurance companies that sell policies to other insurance companies, allowing them to reduce their risks and protect themselves from very large losses. The reinsurance market is dominated by a few very large companies, with huge reserves. A reinsurer may also be a direct writer of insurance risks as well.
Captive insurance companies may be defined as limited-purpose insurance companies established with the specific objective of financing risks emanating from their parent group or groups. This definition can sometimes be extended to include some of the risks of the parent company's customers. In short, it is an in-house self-insurance vehicle. Captives may take the form of a "pure" entity (which is a 100% subsidiary of the self-insured parent company); of a "mutual" captive (which insures the collective risks of members of an industry); and of an "association" captive (which self-insures individual risks of the members of a professional, commercial or industrial association). Captives represent commercial, economic and tax advantages to their sponsors because of the reductions in costs they help create and for the ease of insurance risk management and the flexibility for cash flows they generate. Additionally, they may provide coverage of risks which is neither available nor offered in the traditional insurance market at reasonable prices.
The types of risk that a captive can underwrite for their parents include property damage, public and product liability, professional indemnity, employee benefits, employers' liability, motor and medical aid expenses. The captive's exposure to such risks may be limited by the use of reinsurance.
Captives are becoming an increasingly important component of the risk management and risk financing strategy of their parent. This can be understood against the following background:
* heavy and increasing premium costs in almost every line of coverage;
* difficulties in insuring certain types of fortuitous risk;
* differential coverage standards in various parts of the world;
* rating structures which reflect market trends rather than individual loss experience;
* insufficient credit for deductibles and/or loss control efforts.
There are also companies known as 'insurance consultants'. Like a mortgage broker, these companies are paid a fee by the customer to shop around for the best insurance policy amongst many companies. Similar to an insurance consultant, an 'insurance broker' also shops around for the best insurance policy amongst many companies. However, with insurance brokers, the fee is usually paid in the form of commission from the insurer that is selected rather than directly from the client.
Neither insurance consultants nor insurance brokers are insurance companies and no risks are transferred to them in insurance transactions. Third party administrators are companies that perform underwriting and sometimes claims handling services for insurance companies. These companies often have special expertise that the insurance companies do not have.
The financial stability and strength of an insurance company should be a major consideration when buying an insurance contract. An insurance premium paid currently provides coverage for losses that might arise many years in the future. For that reason, the viability of the insurance carrier is very important. In recent years, a number of insurance companies have become insolvent, leaving their policyholders with no coverage (or coverage only from a government-backed insurance pool or other arrangement with less attractive payouts for losses). A number of independent rating agencies, such as Best's, Fitch, Standard & Poor's, and Moody's Investors Service, provide information and rate the financial viability of insurance companies.
* Life insurance companies, which sell life insurance, annuities and pensions products.
* Non-life, General, or Property/Casualty insurance companies, which sell other types of insurance.
General insurance companies can be further divided into these sub categories.
* Standard Lines
* Excess Lines
In most countries, life and non-life insurers are subject to different regulatory regimes and different tax and accounting rules. The main reason for the distinction between the two types of company is that life, annuity, and pension business is very long-term in nature — coverage for life assurance or a pension can cover risks over many decades. By contrast, non-life insurance cover usually covers a shorter period, such as one year.
In the United States, standard line insurance companies are "mainstream" insurers. These are the companies that typically insure autos, homes or businesses. They use pattern or "cookie-cutter" policies without variation from one person to the next. They usually have lower premiums than excess lines and can sell directly to individuals. They are regulated by state laws that can restrict the amount they can charge for insurance policies.
Excess line insurance companies (aka Excess and Surplus) typically insure risks not covered by the standard lines market. They are broadly referred as being all insurance placed with non-admitted insurers. Non-admitted insurers are not licensed in the states where the risks are located. These companies have more flexibility and can react faster than standard insurance companies because they are not required to file rates and forms as the "admitted" carriers do. However, they still have substantial regulatory requirements placed upon them. State laws generally require insurance placed with surplus line agents and brokers not to be available through standard licensed insurers.
Insurance companies are generally classified as either mutual or stock companies. Mutual companies are owned by the policyholders, while stockholders (who may or may not own policies) own stock 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. Other possible forms for an insurance company include reciprocals, in which policyholders 'reciprocate' in sharing risks, and Lloyds organizations.
Insurance companies are rated by various agencies such as A. M. Best. The ratings include the company's financial strength, which measures its ability to pay claims. It also rates financial instruments issued by the insurance company, such as bonds, notes, and securitization products.
Reinsurance companies are insurance companies that sell policies to other insurance companies, allowing them to reduce their risks and protect themselves from very large losses. The reinsurance market is dominated by a few very large companies, with huge reserves. A reinsurer may also be a direct writer of insurance risks as well.
Captive insurance companies may be defined as limited-purpose insurance companies established with the specific objective of financing risks emanating from their parent group or groups. This definition can sometimes be extended to include some of the risks of the parent company's customers. In short, it is an in-house self-insurance vehicle. Captives may take the form of a "pure" entity (which is a 100% subsidiary of the self-insured parent company); of a "mutual" captive (which insures the collective risks of members of an industry); and of an "association" captive (which self-insures individual risks of the members of a professional, commercial or industrial association). Captives represent commercial, economic and tax advantages to their sponsors because of the reductions in costs they help create and for the ease of insurance risk management and the flexibility for cash flows they generate. Additionally, they may provide coverage of risks which is neither available nor offered in the traditional insurance market at reasonable prices.
The types of risk that a captive can underwrite for their parents include property damage, public and product liability, professional indemnity, employee benefits, employers' liability, motor and medical aid expenses. The captive's exposure to such risks may be limited by the use of reinsurance.
Captives are becoming an increasingly important component of the risk management and risk financing strategy of their parent. This can be understood against the following background:
* heavy and increasing premium costs in almost every line of coverage;
* difficulties in insuring certain types of fortuitous risk;
* differential coverage standards in various parts of the world;
* rating structures which reflect market trends rather than individual loss experience;
* insufficient credit for deductibles and/or loss control efforts.
There are also companies known as 'insurance consultants'. Like a mortgage broker, these companies are paid a fee by the customer to shop around for the best insurance policy amongst many companies. Similar to an insurance consultant, an 'insurance broker' also shops around for the best insurance policy amongst many companies. However, with insurance brokers, the fee is usually paid in the form of commission from the insurer that is selected rather than directly from the client.
Neither insurance consultants nor insurance brokers are insurance companies and no risks are transferred to them in insurance transactions. Third party administrators are companies that perform underwriting and sometimes claims handling services for insurance companies. These companies often have special expertise that the insurance companies do not have.
The financial stability and strength of an insurance company should be a major consideration when buying an insurance contract. An insurance premium paid currently provides coverage for losses that might arise many years in the future. For that reason, the viability of the insurance carrier is very important. In recent years, a number of insurance companies have become insolvent, leaving their policyholders with no coverage (or coverage only from a government-backed insurance pool or other arrangement with less attractive payouts for losses). A number of independent rating agencies, such as Best's, Fitch, Standard & Poor's, and Moody's Investors Service, provide information and rate the financial viability of insurance companies.
Closed community self-insurance
Some communities prefer to create virtual insurance amongst themselves by other means than contractual risk transfer, which assigns explicit numerical values to risk. A number of religious groups, including the Amish and some Muslim groups, depend on support provided by their communities when disasters strike. The risk presented by any given person is assumed collectively by the community who all bear the cost of rebuilding lost property and supporting people whose needs are suddenly greater after a loss of some kind. In supportive communities where others can be trusted to follow community leaders, this tacit form of insurance can work. In this manner the community can even out the extreme differences in insurability that exist among its members. Some further justification is also provided by invoking the moral hazard of explicit insurance contracts.
In the United Kingdom, The Crown (which, for practical purposes, meant the Civil service) did not insure property such as government buildings. If a government building was damaged, the cost of repair would be met from public funds because, in the long run, this was cheaper than paying insurance premiums. Since many UK government buildings have been sold to property companies, and rented back, this arrangement is now less common and may have disappeared altogether.
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 financing vehicles
* Fraternal insurance is provided on a cooperative basis by fraternal benefit societies or other social organizations.[13]
* No-fault insurance is a type of insurance policy (typically automobile insurance) where insureds are indemnified by their own insurer regardless of fault in the incident.
* Protected Self-Insurance is an alternative risk financing mechanism in which an organization retains the mathematically calculated cost of risk within the organization and transfers the catastrophic risk with specific and aggregate limits to an insurer so the maximum total cost of the program is known. A properly designed and underwritten Protected Self-Insurance Program reduces and stabilizes the cost of insurance and provides valuable risk management information.
* Retrospectively Rated Insurance is a method of establishing a premium on large commercial accounts. The final premium is based on the insured's actual loss experience during the policy term, sometimes subject to a minimum and maximum premium, with the final premium determined by a formula. Under this plan, the current year's premium is based partially (or wholly) on the current year's losses, although the premium adjustments may take months or years beyond the current year's expiration date. The rating formula is guaranteed in the insurance contract. Formula: retrospective premium = converted loss + basic premium × tax multiplier. Numerous variations of this formula have been developed and are in use.
* Formal self insurance is the deliberate decision to pay for otherwise insurable losses out of one's own money. This can be done on a formal basis by establishing a separate fund into which funds are deposited on a periodic basis, or by simply forgoing the purchase of available insurance and paying out-of-pocket. Self insurance is usually used to pay for high-frequency, low-severity losses. Such losses, if covered by conventional insurance, mean having to pay a premium that includes loadings for the company's general expenses, cost of putting the policy on the books, acquisition expenses, premium taxes, and contingencies. While this is true for all insurance, for small, frequent losses the transaction costs may exceed the benefit of volatility reduction that insurance otherwise affords.
* Reinsurance is a type of insurance purchased by insurance companies or self-insured employers to protect against unexpected losses. Financial reinsurance is a form of reinsurance that is primarily used for capital management rather than to transfer insurance risk.
* Social insurance can be many things to many people in many countries. But a summary of its essence is that it is a collection of insurance coverages (including components of life insurance, disability income insurance, unemployment insurance, health insurance, and others), plus retirement savings, that requires participation by all citizens. By forcing everyone in society to be a policyholder and pay premiums, it ensures that everyone can become a claimant when or if he/she needs to. Along the way this inevitably becomes related to other concepts such as the justice system and the welfare state. This is a large, complicated topic that engenders tremendous debate, which can be further studied in the following articles (and others):
o National Insurance
o Social safety net
o Social security
o Social Security debate (United States)
o Social Security (United States)
o 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.
* No-fault insurance is a type of insurance policy (typically automobile insurance) where insureds are indemnified by their own insurer regardless of fault in the incident.
* Protected Self-Insurance is an alternative risk financing mechanism in which an organization retains the mathematically calculated cost of risk within the organization and transfers the catastrophic risk with specific and aggregate limits to an insurer so the maximum total cost of the program is known. A properly designed and underwritten Protected Self-Insurance Program reduces and stabilizes the cost of insurance and provides valuable risk management information.
* Retrospectively Rated Insurance is a method of establishing a premium on large commercial accounts. The final premium is based on the insured's actual loss experience during the policy term, sometimes subject to a minimum and maximum premium, with the final premium determined by a formula. Under this plan, the current year's premium is based partially (or wholly) on the current year's losses, although the premium adjustments may take months or years beyond the current year's expiration date. The rating formula is guaranteed in the insurance contract. Formula: retrospective premium = converted loss + basic premium × tax multiplier. Numerous variations of this formula have been developed and are in use.
* Formal self insurance is the deliberate decision to pay for otherwise insurable losses out of one's own money. This can be done on a formal basis by establishing a separate fund into which funds are deposited on a periodic basis, or by simply forgoing the purchase of available insurance and paying out-of-pocket. Self insurance is usually used to pay for high-frequency, low-severity losses. Such losses, if covered by conventional insurance, mean having to pay a premium that includes loadings for the company's general expenses, cost of putting the policy on the books, acquisition expenses, premium taxes, and contingencies. While this is true for all insurance, for small, frequent losses the transaction costs may exceed the benefit of volatility reduction that insurance otherwise affords.
* Reinsurance is a type of insurance purchased by insurance companies or self-insured employers to protect against unexpected losses. Financial reinsurance is a form of reinsurance that is primarily used for capital management rather than to transfer insurance risk.
* Social insurance can be many things to many people in many countries. But a summary of its essence is that it is a collection of insurance coverages (including components of life insurance, disability income insurance, unemployment insurance, health insurance, and others), plus retirement savings, that requires participation by all citizens. By forcing everyone in society to be a policyholder and pay premiums, it ensures that everyone can become a claimant when or if he/she needs to. Along the way this inevitably becomes related to other concepts such as the justice system and the welfare state. This is a large, complicated topic that engenders tremendous debate, which can be further studied in the following articles (and others):
o National Insurance
o Social safety net
o Social security
o Social Security debate (United States)
o Social Security (United States)
o 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.
Other types
* Collateral protection insurance or CPI, insures property (primarily vehicles) held as collateral for loans made by lending institutions.
* Defense Base Act Workers' compensation or DBA Insurance provides coverage for civilian workers hired by the government to perform contracts outside the U.S. 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.
* Financial loss insurance protects individuals and companies against various financial risks. For example, a business might purchase coverage to protect it from loss of sales if a fire in a factory prevented it from carrying out its business for a time. Insurance might also cover the failure of a creditor to pay money it owes to the insured. This type of insurance is frequently referred to as "business interruption insurance." Fidelity bonds and surety bonds are included in this category, although these products provide a benefit to a third party (the "obligee") in the event the insured party (usually referred to as the "obligor") fails to perform its obligations under a contract with the obligee.
* Kidnap and ransom insurance
* Locked funds insurance is a little-known hybrid insurance policy jointly issued by governments and banks. It is used to protect public funds from tamper by unauthorized parties. In special cases, a government may authorize its use in protecting semi-private funds which are liable to tamper. The terms of this type of insurance are usually very strict. Therefore it is used only in extreme cases where maximum security of funds is required.
* Nuclear incident insurance covers damages resulting from an incident involving radioactive materials and is generally arranged at the national level. See the Nuclear exclusion clause and for the United States the Price-Anderson Nuclear Industries Indemnity Act)
* Pet insurance insures pets against accidents and illnesses - some companies cover routine/wellness care and burial, as well.
* Pollution Insurance, which consists of first-party coverage for contamination of insured property either by external or on-site sources. Coverage for liability to third parties arising from contamination of air, water, or land due to the sudden and accidental release of hazardous materials from the insured site. The policy usually covers the costs of cleanup and may include coverage for releases from underground storage tanks. Intentional acts are specifically excluded.
* Purchase insurance is aimed at providing protection on the products people purchase. Purchase insurance can cover individual purchase protection, warranties, guarantees, care plans and even mobile phone insurance. Such insurance is normally very limited in the scope of problems that are covered by the policy.
* Title insurance provides a guarantee that title to real property is vested in the purchaser and/or mortgagee, free and clear of liens or encumbrances. It is usually issued in conjunction with a search of the public records performed at the time of a real estate transaction.
* Travel insurance is an insurance cover taken by those who travel abroad, which covers certain losses such as medical expenses, loss of personal belongings, travel delay, personal liabilities, etc.
* Defense Base Act Workers' compensation or DBA Insurance provides coverage for civilian workers hired by the government to perform contracts outside the U.S. 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.
* Financial loss insurance protects individuals and companies against various financial risks. For example, a business might purchase coverage to protect it from loss of sales if a fire in a factory prevented it from carrying out its business for a time. Insurance might also cover the failure of a creditor to pay money it owes to the insured. This type of insurance is frequently referred to as "business interruption insurance." Fidelity bonds and surety bonds are included in this category, although these products provide a benefit to a third party (the "obligee") in the event the insured party (usually referred to as the "obligor") fails to perform its obligations under a contract with the obligee.
* Kidnap and ransom insurance
* Locked funds insurance is a little-known hybrid insurance policy jointly issued by governments and banks. It is used to protect public funds from tamper by unauthorized parties. In special cases, a government may authorize its use in protecting semi-private funds which are liable to tamper. The terms of this type of insurance are usually very strict. Therefore it is used only in extreme cases where maximum security of funds is required.
* Nuclear incident insurance covers damages resulting from an incident involving radioactive materials and is generally arranged at the national level. See the Nuclear exclusion clause and for the United States the Price-Anderson Nuclear Industries Indemnity Act)
* Pet insurance insures pets against accidents and illnesses - some companies cover routine/wellness care and burial, as well.
* Pollution Insurance, which consists of first-party coverage for contamination of insured property either by external or on-site sources. Coverage for liability to third parties arising from contamination of air, water, or land due to the sudden and accidental release of hazardous materials from the insured site. The policy usually covers the costs of cleanup and may include coverage for releases from underground storage tanks. Intentional acts are specifically excluded.
* Purchase insurance is aimed at providing protection on the products people purchase. Purchase insurance can cover individual purchase protection, warranties, guarantees, care plans and even mobile phone insurance. Such insurance is normally very limited in the scope of problems that are covered by the policy.
* Title insurance provides a guarantee that title to real property is vested in the purchaser and/or mortgagee, free and clear of liens or encumbrances. It is usually issued in conjunction with a search of the public records performed at the time of a real estate transaction.
* Travel insurance is an insurance cover taken by those who travel abroad, which covers certain losses such as medical expenses, loss of personal belongings, travel delay, personal liabilities, etc.
Credit
Credit insurance repays some or all of a loan when certain things happen to the borrower such as unemployment, disability, or death.
* Mortgage insurance insures the lender against default by the borrower. Mortgage insurance is a form of credit insurance, although the name credit insurance more often is used to refer to policies that cover other kinds of debt.
* 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.
Liability
Liability insurance is a very broad superset that covers legal claims against the insured. Many types of insurance include an aspect of liability coverage. For example, a homeowner's insurance policy will normally include liability coverage which protects the insured in the event of a claim brought by someone who slips and falls on the property; automobile insurance also includes an aspect of liability insurance that indemnifies against the harm that a crashing car can cause to others' lives, health, or property. The protection offered by a liability insurance policy is twofold: a legal defense in the event of a lawsuit commenced against the policyholder and indemnification (payment on behalf of the insured) with respect to a settlement or court verdict. Liability policies typically cover only the negligence of the insured, and will not apply to results of wilful or intentional acts by the insured.
* Directors and officers liability insurance protects an organization (usually a corporation) from costs associated with litigation resulting from mistakes made by directors and officers for which they are liable. In the industry, it is usually called "D&O" for short.
* Environmental liability insurance protects the insured from bodily injury, property damage and cleanup costs as a result of the dispersal, release or escape of pollutants.
* Errors and omissions insurance: See "Professional liability insurance" under "Liability insurance".
* 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, protects insured professionals such as architectural corporation and medical practice against potential negligence claims made by their patients/clients. Professional liability insurance may take on different names depending on the profession. For example, professional liability insurance in reference to the medical profession may be called malpractice insurance. Notaries public may take out errors and omissions insurance (E&O). Other potential E&O policyholders include, for example, real estate brokers, Insurance agents, home inspectors, appraisers, and website developers.
* Directors and officers liability insurance protects an organization (usually a corporation) from costs associated with litigation resulting from mistakes made by directors and officers for which they are liable. In the industry, it is usually called "D&O" for short.
* Environmental liability insurance protects the insured from bodily injury, property damage and cleanup costs as a result of the dispersal, release or escape of pollutants.
* Errors and omissions insurance: See "Professional liability insurance" under "Liability insurance".
* 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, protects insured professionals such as architectural corporation and medical practice against potential negligence claims made by their patients/clients. Professional liability insurance may take on different names depending on the profession. For example, professional liability insurance in reference to the medical profession may be called malpractice insurance. Notaries public may take out errors and omissions insurance (E&O). Other potential E&O policyholders include, for example, real estate brokers, Insurance agents, home inspectors, appraisers, and website developers.
Property
Property insurance provides protection against risks to property, such as fire, theft or weather damage. This includes specialized forms of insurance such as fire insurance, flood insurance, earthquake insurance, home insurance, inland marine insurance or boiler insurance.
* Automobile insurance, known in the UK as motor insurance, is probably the most common form of insurance and may cover both legal liability claims against the driver and loss of or damage to the insured's vehicle itself. Throughout the United States an auto insurance policy is required to legally operate a motor vehicle on public roads. In some jurisdictions, bodily injury compensation for automobile accident victims has been changed to a no-fault system, which reduces or eliminates the ability to sue for compensation but provides automatic eligibility for benefits. Credit card companies insure against damage on rented cars.
o Driving School Insurance insurance provides cover for any authorized driver whilst undergoing tuition, cover also unlike other motor policies provides cover for instructor liability where both the pupil and driving instructor are equally liable in the event of a claim.
* Aviation insurance insures against hull, spares, deductibles, hull wear and liability risks.
* Boiler insurance (also known as boiler and machinery insurance or equipment breakdown insurance) insures against accidental physical damage to equipment or machinery.
* Builder's risk insurance insures against the risk of physical loss or damage to property during construction. Builder's risk insurance is typically written on an "all risk" basis covering damage due to any cause (including the negligence of the insured) not otherwise expressly excluded.
* Crop insurance "Farmers use crop insurance to reduce or manage various risks associated with growing crops. Such risks include crop loss or damage caused by weather, hail, drought, frost damage, insects, or disease, for instance."[12]
* Earthquake insurance is a form of property insurance that pays the policyholder in the event of an earthquake that causes damage to the property. Most ordinary homeowners insurance policies do not cover earthquake damage. Most earthquake insurance policies feature a high deductible. Rates depend on location and the probability of an earthquake, as well as the construction of the home.
* A fidelity bond is a form of casualty insurance that covers policyholders for losses that they incur as a result of fraudulent acts by specified individuals. It usually insures a business for losses caused by the dishonest acts of its employees.
* Flood insurance protects against property loss due to flooding. Many insurers in the U.S. do not provide flood insurance in some portions of the country. In response to this, the federal government created the National Flood Insurance Program which serves as the insurer of last resort.
* Home insurance or homeowners' insurance: See "Property insurance".
* Landlord insurance is specifically designed for people who own properties which they rent out. Most house insurance cover in the U.K will not be valid if the property is rented out therefore landlords must take out this specialist form of home insurance.
* Marine insurance and marine cargo insurance cover the loss or damage of ships at sea or on inland waterways, and of the cargo that may be on them. When the owner of the cargo and the carrier are separate corporations, marine cargo insurance typically compensates the owner of cargo for losses sustained from fire, shipwreck, etc., but excludes losses that can be recovered from the carrier or the carrier's insurance. Many marine insurance underwriters will include "time element" coverage in such policies, which extends the indemnity to cover loss of profit and other business expenses attributable to the delay caused by a covered loss.
* Surety bond insurance is a three party insurance guaranteeing the performance of the principal.
* Terrorism insurance provides protection against any loss or damage caused by terrorist activities.
* Volcano insurance is an insurance that covers volcano damage in Hawaii.
* Windstorm insurance is an insurance covering the damage that can be caused by hurricanes and tropical cyclones.
* Automobile insurance, known in the UK as motor insurance, is probably the most common form of insurance and may cover both legal liability claims against the driver and loss of or damage to the insured's vehicle itself. Throughout the United States an auto insurance policy is required to legally operate a motor vehicle on public roads. In some jurisdictions, bodily injury compensation for automobile accident victims has been changed to a no-fault system, which reduces or eliminates the ability to sue for compensation but provides automatic eligibility for benefits. Credit card companies insure against damage on rented cars.
o Driving School Insurance insurance provides cover for any authorized driver whilst undergoing tuition, cover also unlike other motor policies provides cover for instructor liability where both the pupil and driving instructor are equally liable in the event of a claim.
* Aviation insurance insures against hull, spares, deductibles, hull wear and liability risks.
* Boiler insurance (also known as boiler and machinery insurance or equipment breakdown insurance) insures against accidental physical damage to equipment or machinery.
* Builder's risk insurance insures against the risk of physical loss or damage to property during construction. Builder's risk insurance is typically written on an "all risk" basis covering damage due to any cause (including the negligence of the insured) not otherwise expressly excluded.
* Crop insurance "Farmers use crop insurance to reduce or manage various risks associated with growing crops. Such risks include crop loss or damage caused by weather, hail, drought, frost damage, insects, or disease, for instance."[12]
* Earthquake insurance is a form of property insurance that pays the policyholder in the event of an earthquake that causes damage to the property. Most ordinary homeowners insurance policies do not cover earthquake damage. Most earthquake insurance policies feature a high deductible. Rates depend on location and the probability of an earthquake, as well as the construction of the home.
* A fidelity bond is a form of casualty insurance that covers policyholders for losses that they incur as a result of fraudulent acts by specified individuals. It usually insures a business for losses caused by the dishonest acts of its employees.
* Flood insurance protects against property loss due to flooding. Many insurers in the U.S. do not provide flood insurance in some portions of the country. In response to this, the federal government created the National Flood Insurance Program which serves as the insurer of last resort.
* Home insurance or homeowners' insurance: See "Property insurance".
* Landlord insurance is specifically designed for people who own properties which they rent out. Most house insurance cover in the U.K will not be valid if the property is rented out therefore landlords must take out this specialist form of home insurance.
* Marine insurance and marine cargo insurance cover the loss or damage of ships at sea or on inland waterways, and of the cargo that may be on them. When the owner of the cargo and the carrier are separate corporations, marine cargo insurance typically compensates the owner of cargo for losses sustained from fire, shipwreck, etc., but excludes losses that can be recovered from the carrier or the carrier's insurance. Many marine insurance underwriters will include "time element" coverage in such policies, which extends the indemnity to cover loss of profit and other business expenses attributable to the delay caused by a covered loss.
* Surety bond insurance is a three party insurance guaranteeing the performance of the principal.
* Terrorism insurance provides protection against any loss or damage caused by terrorist activities.
* Volcano insurance is an insurance that covers volcano damage in Hawaii.
* Windstorm insurance is an insurance covering the damage that can be caused by hurricanes and tropical cyclones.
Life
Life insurance provides a monetary benefit to a decedent's family or other designated beneficiary, and may specifically provide for income to an insured person's family, burial, funeral and other final expenses. Life insurance policies often allow the option of having the proceeds paid to the beneficiary either in a lump sum cash payment or an annuity.
Annuities provide a stream of payments and are generally classified as insurance because they are issued by insurance companies and regulated as insurance and require the same kinds of actuarial and investment management expertise that life insurance requires. Annuities and pensions that pay a benefit for life are sometimes regarded as insurance against the possibility that a retiree will outlive his or her financial resources. In that sense, they are the complement of life insurance and, from an underwriting perspective, are the mirror image of life insurance.
Certain life insurance contracts accumulate cash values, which may be taken by the insured if the policy is surrendered or which may be borrowed against. Some policies, such as annuities and endowment policies, are financial instruments to accumulate or liquidate wealth when it is needed.
In many countries, such as the U.S. and the UK, the tax law provides that the interest on this cash value is not taxable under certain circumstances. This leads to widespread use of life insurance as a tax-efficient method of saving as well as protection in the event of early death.
In U.S., the tax on interest income on life insurance policies and annuities is generally deferred. However, in some cases the benefit derived from tax deferral may be offset by a low return. This depends upon the insuring company, the type of policy and other variables (mortality, market return, etc.). Moreover, other income tax saving vehicles (e.g., IRAs, 401(k) plans, Roth IRAs) may be better alternatives for value accumulation. A combination of low-cost term life insurance and a higher-return tax-efficient retirement account may achieve better investment return.
Annuities provide a stream of payments and are generally classified as insurance because they are issued by insurance companies and regulated as insurance and require the same kinds of actuarial and investment management expertise that life insurance requires. Annuities and pensions that pay a benefit for life are sometimes regarded as insurance against the possibility that a retiree will outlive his or her financial resources. In that sense, they are the complement of life insurance and, from an underwriting perspective, are the mirror image of life insurance.
Certain life insurance contracts accumulate cash values, which may be taken by the insured if the policy is surrendered or which may be borrowed against. Some policies, such as annuities and endowment policies, are financial instruments to accumulate or liquidate wealth when it is needed.
In many countries, such as the U.S. and the UK, the tax law provides that the interest on this cash value is not taxable under certain circumstances. This leads to widespread use of life insurance as a tax-efficient method of saving as well as protection in the event of early death.
In U.S., the tax on interest income on life insurance policies and annuities is generally deferred. However, in some cases the benefit derived from tax deferral may be offset by a low return. This depends upon the insuring company, the type of policy and other variables (mortality, market return, etc.). Moreover, other income tax saving vehicles (e.g., IRAs, 401(k) plans, Roth IRAs) may be better alternatives for value accumulation. A combination of low-cost term life insurance and a higher-return tax-efficient retirement account may achieve better investment return.
Casualty
Casualty insurance insures against accidents, not necessarily tied to any specific property.
* Crime insurance is a form of casualty insurance that covers the policyholder against losses arising from the criminal acts of third parties. For example, a company can obtain crime insurance to cover losses arising from theft or embezzlement.
* Political risk insurance is a form of casualty insurance that can be taken out by businesses with operations in countries in which there is a risk that revolution or other political conditions will result in a loss.
* Crime insurance is a form of casualty insurance that covers the policyholder against losses arising from the criminal acts of third parties. For example, a company can obtain crime insurance to cover losses arising from theft or embezzlement.
* Political risk insurance is a form of casualty insurance that can be taken out by businesses with operations in countries in which there is a risk that revolution or other political conditions will result in a loss.
Disability
* Disability insurance policies provide financial support in the event the policyholder is unable to work because of disabling illness or injury. It provides monthly support to help pay such obligations as mortgages and credit cards.
* 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.
* 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.
Health
Health insurance policies by the National Health Service in the United Kingdom (NHS) or other publicly-funded health programs will cover the cost of medical treatments. Dental insurance, like medical insurance, is coverage for individuals to protect them against dental costs. In the U.S., dental insurance is often part of an employer's benefits package, along with health insurance.
Home insurance
Home insurance provides compensation for damage or destruction of a home from disasters. In some geographical areas, the standard insurances excludes certain types of disasters, such as flood and earthquakes, that require additional coverage. Maintenance-related problems are the homeowners' 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.
Auto insurance
Auto insurance protects you against financial loss if you have an accident. It is a contract between you and the insurance company. You agree to pay the premium and the insurance company agrees to pay your losses as defined in your policy. Auto insurance provides property, liability and medical coverage:
1. Property coverage pays for damage to or theft of your car.
2. Liability coverage pays for your legal responsibility to others for bodily injury or property damage.
3. Medical coverage pays for the cost of treating injuries, rehabilitation and sometimes lost wages and funeral expenses.
An auto insurance policy is comprised of six different kinds of coverage. Most countries require you to buy some, but not all, of these coverages. If you're financing a car, your lender may also have requirements. Most auto policies are for six months to a year.
In the United States, your insurance company should notify you by mail when it’s time to renew the policy and to pay your premium.
1. Property coverage pays for damage to or theft of your car.
2. Liability coverage pays for your legal responsibility to others for bodily injury or property damage.
3. Medical coverage pays for the cost of treating injuries, rehabilitation and sometimes lost wages and funeral expenses.
An auto insurance policy is comprised of six different kinds of coverage. Most countries require you to buy some, but not all, of these coverages. If you're financing a car, your lender may also have requirements. Most auto policies are for six months to a year.
In the United States, your insurance company should notify you by mail when it’s time to renew the policy and to pay your premium.
Types of insurance
Any risk that can be quantified can potentially be insured. Specific kinds of risk that may give rise to claims are known as "perils". An insurance policy will set out in detail which perils are covered by the policy and which are not. Below are (non-exhaustive) lists of the many different types of insurance that exist. A single policy may cover risks in one or more of the categories set out below. For example, auto insurance would typically cover both property risk (covering the risk of theft or damage to the car) and liability risk (covering legal claims from causing an accident). A homeowner's insurance policy in the U.S. typically includes property insurance covering damage to the home and the owner's belongings, liability insurance covering certain legal claims against the owner, and even a small amount of coverage for medical expenses of guests who are injured on the owner's property.
Business insurance can be any kind of insurance that protects businesses against risks. Some principal subtypes of business insurance are (a) the various kinds of professional liability insurance, also called professional indemnity insurance, which are discussed below under that name; and (b) the business owner's policy (BOP), which bundles into one policy many of the kinds of coverage that a business owner needs, in a way analogous to how homeowners insurance bundles the coverages that a homeowner needs.
Business insurance can be any kind of insurance that protects businesses against risks. Some principal subtypes of business insurance are (a) the various kinds of professional liability insurance, also called professional indemnity insurance, which are discussed below under that name; and (b) the business owner's policy (BOP), which bundles into one policy many of the kinds of coverage that a business owner needs, in a way analogous to how homeowners insurance bundles the coverages that a homeowner needs.
History of insurance
In some sense we can say that insurance appears simultaneously with the appearance of human society. We know of two types of economies in human societies: money economies (with markets, money, financial instruments and so on) and non-money or natural economies (without money, markets, financial instruments and so on). The second type is a more ancient form than the first. In such an economy and community, we can see insurance in the form of people helping each other. For example, if a house burns down, the members of the community help build a new one. Should the same thing happen to one's neighbour, the other neighbours must help. Otherwise, neighbours will not receive help in the future. This type of insurance has survived to the present day in some countries where modern money economy with its financial instruments is not widespread (for example countries in the territory of the former Soviet Union).
Turning to insurance in the modern sense (i.e., insurance in a modern money economy, in which insurance is part of the financial sphere), early methods of transferring or distributing risk were practised by Chinese and Babylonian traders as long ago as the 3rd and 2nd millennia BC, respectively.[8] Chinese merchants travelling treacherous river rapids would redistribute their wares across many vessels to limit the loss due to any single vessel's capsizing. The Babylonians developed a system which was recorded in the famous Code of Hammurabi, c. 1750 BC, and practised by early Mediterranean sailing merchants. If a merchant received a loan to fund his shipment, he would pay the lender an additional sum in exchange for the lender's guarantee to cancel the loan should the shipment be stolen.
Achaemenian monarchs of Iran were the first to insure their people and made it official by registering the insuring process in governmental notary offices. The insurance tradition was performed each year in Norouz (beginning of the Iranian New Year); the heads of different ethnic groups as well as others willing to take part, presented gifts to the monarch. The most important gift was presented during a special ceremony. When a gift was worth more than 10,000 Derrik (Achaemenian gold coin) the issue was registered in a special office. This was advantageous to those who presented such special gifts. For others, the presents were fairly assessed by the confidants of the court. Then the assessment was registered in special offices.
The purpose of registering was that whenever the person who presented the gift registered by the court was in trouble, the monarch and the court would help him. Jahez, a historian and writer, writes in one of his books on ancient Iran: "[W]henever the owner of the present is in trouble or wants to construct a building, set up a feast, have his children married, etc. the one in charge of this in the court would check the registration. If the registered amount exceeded 10,000 Derrik, he or she would receive an amount of twice as much."[1]
A thousand years later, the inhabitants of Rhodes invented the concept of the 'general average'. Merchants whose goods were being shipped together would pay a proportionally divided premium which would be used to reimburse any merchant whose goods were jettisoned during storm or sinkage.
The Greeks and Romans introduced the origins of health and life insurance c. 600 AD when they organized guilds called "benevolent societies" which cared for the families and paid funeral expenses of members upon death. Guilds in the Middle Ages served a similar purpose. The Talmud deals with several aspects of insuring goods. Before insurance was established in the late 17th century, "friendly societies" existed in England, in which people donated amounts of money to a general sum that could be used for emergencies.
Separate insurance contracts (i.e., insurance policies not bundled with loans or other kinds of contracts) were invented in Genoa in the 14th century, as were insurance pools backed by pledges of landed estates. These new insurance contracts allowed insurance to be separated from investment, a separation of roles that first proved useful in marine insurance. Insurance became far more sophisticated in post-Renaissance Europe, and specialized varieties developed.
Toward the end of the seventeenth century, London's growing importance as a centre for trade increased demand for marine insurance. In the late 1680s, Edward Lloyd opened a coffee house that became a popular haunt of ship owners, merchants, and ships’ captains, and thereby a reliable source of the latest shipping news. It became the meeting place for parties wishing to insure cargoes and ships, and those willing to underwrite such ventures. Today, Lloyd's of London remains the leading market (note that it is not an insurance company) for marine and other specialist types of insurance, but it works rather differently than the more familiar kinds of insurance.
Insurance as we know it today can be traced to the Great Fire of London, which in 1666 devoured 13,200 houses. In the aftermath of this disaster, Nicholas Barbon opened an office to insure buildings. In 1680, he established England's first fire insurance company, "The Fire Office," to insure brick and frame homes.
The first insurance company in the United States underwrote fire insurance and was formed in Charles Town (modern-day Charleston), South Carolina, in 1732. Benjamin Franklin helped to popularize and make standard the practice of insurance, particularly against fire in the form of perpetual insurance. In 1752, he founded the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire. Franklin's company was the first to make contributions toward fire prevention. Not only did his company warn against certain fire hazards, it refused to insure certain buildings where the risk of fire was too great, such as all wooden houses. In the United States, regulation of the insurance industry is highly Balkanized, with primary responsibility assumed by individual state insurance departments. Whereas insurance markets have become centralized nationally and internationally, state insurance commissioners operate individually, though at times in concert through a national insurance commissioners' organization. In recent years, some have called for a dual state and federal regulatory system (commonly referred to as the Optional federal charter (OFC)) for insurance similar to that which oversees state banks and national banks.
Turning to insurance in the modern sense (i.e., insurance in a modern money economy, in which insurance is part of the financial sphere), early methods of transferring or distributing risk were practised by Chinese and Babylonian traders as long ago as the 3rd and 2nd millennia BC, respectively.[8] Chinese merchants travelling treacherous river rapids would redistribute their wares across many vessels to limit the loss due to any single vessel's capsizing. The Babylonians developed a system which was recorded in the famous Code of Hammurabi, c. 1750 BC, and practised by early Mediterranean sailing merchants. If a merchant received a loan to fund his shipment, he would pay the lender an additional sum in exchange for the lender's guarantee to cancel the loan should the shipment be stolen.
Achaemenian monarchs of Iran were the first to insure their people and made it official by registering the insuring process in governmental notary offices. The insurance tradition was performed each year in Norouz (beginning of the Iranian New Year); the heads of different ethnic groups as well as others willing to take part, presented gifts to the monarch. The most important gift was presented during a special ceremony. When a gift was worth more than 10,000 Derrik (Achaemenian gold coin) the issue was registered in a special office. This was advantageous to those who presented such special gifts. For others, the presents were fairly assessed by the confidants of the court. Then the assessment was registered in special offices.
The purpose of registering was that whenever the person who presented the gift registered by the court was in trouble, the monarch and the court would help him. Jahez, a historian and writer, writes in one of his books on ancient Iran: "[W]henever the owner of the present is in trouble or wants to construct a building, set up a feast, have his children married, etc. the one in charge of this in the court would check the registration. If the registered amount exceeded 10,000 Derrik, he or she would receive an amount of twice as much."[1]
A thousand years later, the inhabitants of Rhodes invented the concept of the 'general average'. Merchants whose goods were being shipped together would pay a proportionally divided premium which would be used to reimburse any merchant whose goods were jettisoned during storm or sinkage.
The Greeks and Romans introduced the origins of health and life insurance c. 600 AD when they organized guilds called "benevolent societies" which cared for the families and paid funeral expenses of members upon death. Guilds in the Middle Ages served a similar purpose. The Talmud deals with several aspects of insuring goods. Before insurance was established in the late 17th century, "friendly societies" existed in England, in which people donated amounts of money to a general sum that could be used for emergencies.
Separate insurance contracts (i.e., insurance policies not bundled with loans or other kinds of contracts) were invented in Genoa in the 14th century, as were insurance pools backed by pledges of landed estates. These new insurance contracts allowed insurance to be separated from investment, a separation of roles that first proved useful in marine insurance. Insurance became far more sophisticated in post-Renaissance Europe, and specialized varieties developed.
Toward the end of the seventeenth century, London's growing importance as a centre for trade increased demand for marine insurance. In the late 1680s, Edward Lloyd opened a coffee house that became a popular haunt of ship owners, merchants, and ships’ captains, and thereby a reliable source of the latest shipping news. It became the meeting place for parties wishing to insure cargoes and ships, and those willing to underwrite such ventures. Today, Lloyd's of London remains the leading market (note that it is not an insurance company) for marine and other specialist types of insurance, but it works rather differently than the more familiar kinds of insurance.
Insurance as we know it today can be traced to the Great Fire of London, which in 1666 devoured 13,200 houses. In the aftermath of this disaster, Nicholas Barbon opened an office to insure buildings. In 1680, he established England's first fire insurance company, "The Fire Office," to insure brick and frame homes.
The first insurance company in the United States underwrote fire insurance and was formed in Charles Town (modern-day Charleston), South Carolina, in 1732. Benjamin Franklin helped to popularize and make standard the practice of insurance, particularly against fire in the form of perpetual insurance. In 1752, he founded the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire. Franklin's company was the first to make contributions toward fire prevention. Not only did his company warn against certain fire hazards, it refused to insure certain buildings where the risk of fire was too great, such as all wooden houses. In the United States, regulation of the insurance industry is highly Balkanized, with primary responsibility assumed by individual state insurance departments. Whereas insurance markets have become centralized nationally and internationally, state insurance commissioners operate individually, though at times in concert through a national insurance commissioners' organization. In recent years, some have called for a dual state and federal regulatory system (commonly referred to as the Optional federal charter (OFC)) for insurance similar to that which oversees state banks and national banks.
Claims
Finally, claims and loss handling is the materialized utility of insurance; it is the actual "product" paid for, though one hopes it will never need to be used. 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 claim departments employ a large number of claims adjusters supported by a staff of records management and data entry clerks. Incoming claims are classified based on severity and are assigned to adjusters whose settlement authority varies with their knowledge and experience. The adjuster undertakes a thorough investigation of each claim, usually in close cooperation with the insured, determines its reasonable monetary value, and authorizes payment. Adjusting liability insurance claims is particularly difficult because there is a third party involved (the plaintiff who is suing the insured) who is under no contractual obligation to cooperate with the insurer and in fact may regard the insurer as a deep pocket. The adjuster must obtain legal counsel for the insured (either inside "house" counsel or outside "panel" counsel), monitor litigation that may take years to complete, and appear in person or over the telephone with settlement authority at a mandatory settlement conference when requested by the judge.
In managing the claims handling function, insurers seek to balance the elements of customer satisfaction, administrative handling expenses, and claims overpayment leakages. As part of this balancing act, fraudulent insurance practices are a major business risk that must be managed and overcome. Disputes between insurers and insureds over the validity of claims or claims handling practices occasionally escalate into litigation; see insurance bad faith.
Insurance company claim departments employ a large number of claims adjusters supported by a staff of records management and data entry clerks. Incoming claims are classified based on severity and are assigned to adjusters whose settlement authority varies with their knowledge and experience. The adjuster undertakes a thorough investigation of each claim, usually in close cooperation with the insured, determines its reasonable monetary value, and authorizes payment. Adjusting liability insurance claims is particularly difficult because there is a third party involved (the plaintiff who is suing the insured) who is under no contractual obligation to cooperate with the insurer and in fact may regard the insurer as a deep pocket. The adjuster must obtain legal counsel for the insured (either inside "house" counsel or outside "panel" counsel), monitor litigation that may take years to complete, and appear in person or over the telephone with settlement authority at a mandatory settlement conference when requested by the judge.
In managing the claims handling function, insurers seek to balance the elements of customer satisfaction, administrative handling expenses, and claims overpayment leakages. As part of this balancing act, fraudulent insurance practices are a major business risk that must be managed and overcome. Disputes between insurers and insureds over the validity of claims or claims handling practices occasionally escalate into litigation; see insurance bad faith.
Insurers' business model
The business model can be reduced to a simple equation: Profit = earned premium + investment income - incurred loss - underwriting expenses.
Insurers make money in two ways: (1) through underwriting, the process by which insurers select the risks to insure and decide how much in premiums to charge for accepting those risks and (2) by investing the premiums they collect from insured parties.
The most complicated aspect of the insurance business is the underwriting of policies. Using a wide assortment of data, insurers predict the likelihood that a claim will be made against their policies and price products accordingly. To this end, insurers use actuarial science to quantify the risks they are willing to assume and the premium they will charge to assume them. Data is analyzed to fairly accurately project the rate of future claims based on a given risk. Actuarial science uses statistics and probability to analyze the risks associated with the range of perils covered, and these scientific principles are used to determine an insurer's overall exposure. Upon termination of a given policy, the amount of premium collected and the investment gains thereon minus the amount paid out in claims is the insurer's underwriting profit on that policy. Of course, from the insurer's perspective, some policies are winners (i.e., the insurer pays out less in claims and expenses than it receives in premiums and investment income) and some are losers (i.e., the insurer pays out more in claims and expenses than it receives in premiums and investment income).
An insurer's underwriting performance is measured in its combined ratio. The loss ratio (incurred losses and loss-adjustment expenses divided by net earned premium) is added to the expense ratio (underwriting expenses divided by net premium written) to determine the company's combined ratio. The combined ratio is a reflection of the company's overall underwriting profitability. A combined ratio of less than 100 percent indicates underwriting profitability, while anything over 100 indicates an underwriting loss.
Insurance companies also earn investment profits on “float”. “Float” or available reserve is the amount of money, at hand at any given moment, that an insurer has collected in insurance premiums but has not been paid out in claims. Insurers start investing insurance premiums as soon as they are collected and continue to earn interest on them until claims are paid out. The Association of British Insurers (gathering 400 insurance companies and 94% of UK insurance services) has almost 20% of the investments in the London Stock Exchange.[6]
In the United States, the underwriting loss of property and casualty insurance companies was $142.3 billion in the five years ending 2003. But overall profit for the same period was $68.4 billion, as the result of float. Some insurance industry insiders, most notably Hank Greenberg, do not believe that it is forever possible to sustain a profit from float without an underwriting profit as well, but this opinion is not universally held. Naturally, the “float” method is difficult to carry out in an economically depressed period. Bear markets do cause insurers to shift away from investments and to toughen up their underwriting standards. So a poor economy generally means high insurance premiums. This tendency to swing between profitable and unprofitable periods over time is commonly known as the "underwriting" or insurance cycle. [7]
Property and casualty insurers currently make the most money from their auto insurance line of business. Generally better statistics are available on auto losses and underwriting on this line of business has benefited greatly from advances in computing. Additionally, property losses in the United States, due to unpredictable natural catastrophes, have exacerbated this trend.
Insurers make money in two ways: (1) through underwriting, the process by which insurers select the risks to insure and decide how much in premiums to charge for accepting those risks and (2) by investing the premiums they collect from insured parties.
The most complicated aspect of the insurance business is the underwriting of policies. Using a wide assortment of data, insurers predict the likelihood that a claim will be made against their policies and price products accordingly. To this end, insurers use actuarial science to quantify the risks they are willing to assume and the premium they will charge to assume them. Data is analyzed to fairly accurately project the rate of future claims based on a given risk. Actuarial science uses statistics and probability to analyze the risks associated with the range of perils covered, and these scientific principles are used to determine an insurer's overall exposure. Upon termination of a given policy, the amount of premium collected and the investment gains thereon minus the amount paid out in claims is the insurer's underwriting profit on that policy. Of course, from the insurer's perspective, some policies are winners (i.e., the insurer pays out less in claims and expenses than it receives in premiums and investment income) and some are losers (i.e., the insurer pays out more in claims and expenses than it receives in premiums and investment income).
An insurer's underwriting performance is measured in its combined ratio. The loss ratio (incurred losses and loss-adjustment expenses divided by net earned premium) is added to the expense ratio (underwriting expenses divided by net premium written) to determine the company's combined ratio. The combined ratio is a reflection of the company's overall underwriting profitability. A combined ratio of less than 100 percent indicates underwriting profitability, while anything over 100 indicates an underwriting loss.
Insurance companies also earn investment profits on “float”. “Float” or available reserve is the amount of money, at hand at any given moment, that an insurer has collected in insurance premiums but has not been paid out in claims. Insurers start investing insurance premiums as soon as they are collected and continue to earn interest on them until claims are paid out. The Association of British Insurers (gathering 400 insurance companies and 94% of UK insurance services) has almost 20% of the investments in the London Stock Exchange.[6]
In the United States, the underwriting loss of property and casualty insurance companies was $142.3 billion in the five years ending 2003. But overall profit for the same period was $68.4 billion, as the result of float. Some insurance industry insiders, most notably Hank Greenberg, do not believe that it is forever possible to sustain a profit from float without an underwriting profit as well, but this opinion is not universally held. Naturally, the “float” method is difficult to carry out in an economically depressed period. Bear markets do cause insurers to shift away from investments and to toughen up their underwriting standards. So a poor economy generally means high insurance premiums. This tendency to swing between profitable and unprofitable periods over time is commonly known as the "underwriting" or insurance cycle. [7]
Property and casualty insurers currently make the most money from their auto insurance line of business. Generally better statistics are available on auto losses and underwriting on this line of business has benefited greatly from advances in computing. Additionally, property losses in the United States, due to unpredictable natural catastrophes, have exacerbated this trend.
Indemnification
The technical definition of "indemnity" means to make whole again. There are two types of insurance contracts;
1. an "indemnity" policy and
2. a "pay on behalf" or "on behalf of"[3] policy.
The difference is significant on paper, but rarely material in practice.
An "indemnity" policy will never pay claims until the insured has paid out of pocket to some third party; for example, a visitor to your home slips on a floor that you left wet and sues you for $10,000 and wins. Under an "indemnity" policy the homeowner would have to come up with the $10,000 to pay for the visitor's fall and then would be "indemnified" by the insurance carrier for the out of pocket costs (the $10,000)[4].
Under the same situation, a "pay on behalf" policy, the insurance carrier would pay the claim and the insured (the homeowner) would not be out of pocket for anything. Most modern liability insurance is written on the basis of "pay on behalf" language[5].
An entity seeking to transfer risk (an individual, corporation, or association of any type, etc.) becomes the 'insured' party once risk is assumed by an 'insurer', the insuring party, by means of a contract, called an insurance 'policy'. Generally, an insurance contract includes, at a minimum, the following elements: the parties (the insurer, the insured, the beneficiaries), the premium, the period of coverage, the particular loss event covered, the amount of coverage (i.e., the amount to be paid to the insured or beneficiary in the event of a loss), and exclusions (events not covered). An insured is thus said to be "indemnified" against the loss covered in the policy.
When insured parties experience a loss for a specified peril, the coverage entitles the policyholder to make a 'claim' against the insurer for the covered amount of loss as specified by the policy. The fee paid by the insured to the insurer for assuming the risk is called the 'premium'. Insurance premiums from many insureds are used to fund accounts reserved for later payment of claims—in theory for a relatively few claimants—and for overhead costs. So long as an insurer maintains adequate funds set aside for anticipated losses (i.e., reserves), the remaining margin is an insurer's profit.
1. an "indemnity" policy and
2. a "pay on behalf" or "on behalf of"[3] policy.
The difference is significant on paper, but rarely material in practice.
An "indemnity" policy will never pay claims until the insured has paid out of pocket to some third party; for example, a visitor to your home slips on a floor that you left wet and sues you for $10,000 and wins. Under an "indemnity" policy the homeowner would have to come up with the $10,000 to pay for the visitor's fall and then would be "indemnified" by the insurance carrier for the out of pocket costs (the $10,000)[4].
Under the same situation, a "pay on behalf" policy, the insurance carrier would pay the claim and the insured (the homeowner) would not be out of pocket for anything. Most modern liability insurance is written on the basis of "pay on behalf" language[5].
An entity seeking to transfer risk (an individual, corporation, or association of any type, etc.) becomes the 'insured' party once risk is assumed by an 'insurer', the insuring party, by means of a contract, called an insurance 'policy'. Generally, an insurance contract includes, at a minimum, the following elements: the parties (the insurer, the insured, the beneficiaries), the premium, the period of coverage, the particular loss event covered, the amount of coverage (i.e., the amount to be paid to the insured or beneficiary in the event of a loss), and exclusions (events not covered). An insured is thus said to be "indemnified" against the loss covered in the policy.
When insured parties experience a loss for a specified peril, the coverage entitles the policyholder to make a 'claim' against the insurer for the covered amount of loss as specified by the policy. The fee paid by the insured to the insurer for assuming the risk is called the 'premium'. Insurance premiums from many insureds are used to fund accounts reserved for later payment of claims—in theory for a relatively few claimants—and for overhead costs. So long as an insurer maintains adequate funds set aside for anticipated losses (i.e., reserves), the remaining margin is an insurer's profit.
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