Saturday, August 18, 2007
What is Insurance?
Insurance is a financial product where you pay a premium or series of premiums. In return, if a particular event happens you will be compensated financially. Except for life assurance, most insurance is annually renewable. This means that the insurer can change both the premium and the benefits each time, or may even decide to no longer offer insurance to you.Insurers call this general insurance to differentiate it from life assurance.What is life assurance?Life assurance is the term used when you insure your own or someone else's life. Strictly, assurance is policies that you will be paid out on such as endowments and whole-of-life policies, but you can use it for any type of life protection.Life assurance is a bit different to most insurance - most policies last many years rather than having to be renewed each year. And "indemnity rules", whereby you cannot get back more than you have lost, do not apply.Do you have to have insurance?If you have a car or motor bike, the law requires you to have insurance, although it is only interested in making sure that others are protected from what you might do, rather than on you losing money by say damaging your car in an accident.If you have a mortgage, your lender will usually make it a condition of the loan that you have adequate insurance for your home in order to protect itself.Other than that, most insurance is optional.Do you need insurance?If you insure yourself against every eventuality, it will probably cost more than you earn. Plan carefully and only take out what you really believe you will need.Prioritise. That means:Thinking about where you might be vulnerable,What the risk might be of that happening,How else you could cope with the problemHow best to insure against the risk.TipDraw up a list of everything you own and what it is worth. Then add on what would happen if certain disasters struck - such as becoming disabled or unemployed. If you can afford not to worry about the financial loss, then you probably do not need insurance for it.
Life Insurance
Term Life Insurance Guide
Life Insurance Basics Term Life Insurance Permanent Life Insurance Included Features vs. Available Options (Riders) Substandard Ratings
Life Insurance Basics
One simple definition of life insurance states it is coverage placed on the life of an individual whereas an insurance company issues a policy and pays a stated death benefit in the event of the insured's death. Life insurance is intended to provide financial stability and support to the dependents and beneficiaries of the insured.
While the general concept of life insurance seems simple enough, there is nothing simple about the overwhelming number of policy options available in the marketplace today. Our discussion will focus on the two basic types of life insurance: term life insurance and permanent life insurance. We will also briefly describe the most common variations of each type of life insurance.
Term Life Insurance
Term life insurance provides pure life insurance in its most inexpensive form. Term life insurance provides coverage for a set period of time (the policy term) and generally pays a death benefit only if the insured dies during the policy term. The policy term typically ranges from 1 to 30 years, with 20 years being the most common term.
One of the biggest advantages of term life insurance is its lower initial cost in comparison to permanent life insurance. Term life insurance policies have no cash value accounts, policy loan provisions or other features typically found in permanent life insurance policies. With term life policies, you're generally just paying for the death benefit, which is the lump sum payment your beneficiaries will receive if you die during the term of the policy. With most permanent life policies, your premiums help fund the death benefit and can accumulate cash value.
Term life insurance is often a good choice for people in their family-formation years, especially if they're on a tight budget. It allows an individual to buy high levels of coverage when the need for protection is often greatest. Term life insurance is also a good option for covering needs that will disappear in time. For instance, if paying for a child's education is an applicant's major financial goal, it would be wise for the applicant to purchase a term life insurance policy that will cover the period of time necessary to reach that goal.
Level Premium Term Life Insurance:
Level premium term life insurance offers fully-guaranteed premium rates, which means the premiums on the policy are guaranteed to remain the same for the entire term period. Level premium term life insurance is a fully-underwritten product and is available in amounts as low as $50,000 up to $20 million or more, depending on the insurance company. It is the most common form of term life insurance.
Return of Premium (ROP) Term Life Insurance:
Return of Premium (ROP) term life insurance is a relatively new product that combines the advantages of traditional term life insurance such as affordable, guaranteed level premium periods (10, 20 or 30 years), with a return of premium feature. At the end of the level premium period, 100% of the premiums paid will be returned to the policy owner (excluding substandard fees and any extra charges).
Of course, there is a price to be paid for this added benefit. The premiums for ROP policies are higher than premiums for standard term life policies. The insurance company will generally invest these additional premium dollars during the term of the policy, which allows them to return your premiums to you at the end of the term period.
One factor to consider is term life insurance rates have dropped considerably over the past decade, mostly because people are living longer. If you own a standard term life policy, there's really no harm done in dropping that policy in favor of a newer and cheaper term life policy. But if you own a ROP policy, dropping the policy before the full term has expired means that you will have paid a high price for your life insurance coverage and the premiums you've paid may only be partially refunded.
Instant Issue Term Life Insurance:
This revolutionary product combines the advantages of traditional term life insurance such as affordable, guaranteed level-premium periods, with the speed and simplicity of the Internet. Policies are generally issued in as little as 15 minutes with no medical exams and no lengthy underwriting.
Qualified applicants can currently select coverage amounts from as low as $25,000 to $150,000 and coverage periods of 10, 15, or 20 years. A convenient online application allows the applicant to sign digitally through e-signature. There are no forms to fill out or mail. Once approved, the applicant is asked to set up an online account for payment processing and a policy is issued electronically.
Permanent Life Insurance:
Permanent life insurance provides lifelong protection. As long as the premiums are paid, the policy will stay in force until a death benefit is paid. These policies are designed and priced to keep over a long period of time. They are generally recommended for people who believe they will have a lifelong need for life insurance coverage or for coverage that extends beyond the maximum allowed by term life insurance (currently 30 years).
Another characteristic of permanent life insurance is a feature known as cash value or cash-surrender value. In fact, permanent life insurance is often referred to as cash value life insurance because these types of policies can build cash value over time, as well as provide a death benefit to the beneficiaries.
Cash values, which accumulate on a tax-deferred basis just like assets in most retirement plans, can be used in the future for any nearly any purpose. Policy owners can borrow cash value for a down payment on a home, to help pay for their children's education or to provide income for retirement. When money is borrowed from a permanent life insurance policy, the policy's cash value is used as collateral and the borrowing rates tend to be relatively low. And unlike loans from most financial institutions, the loan is not dependent on credit checks or other restrictions. The loan must ultimately be paid back with interest or the beneficiaries will receive a reduced death benefit and cash surrender value.
If the policy owner needs or wants to stop paying premiums, the cash value can be used to continue the current life insurance protection for a specified time, or to provide a lesser amount of protection for the remainder of the policy. If the policy owner decides to stop paying premiums and surrenders the policy, the guaranteed policy values will be paid to him/her.
There are several types of permanent life insurance policies available including whole life, universal life and variable life. Each offers its own set of options and features including fixed or variable premiums, fixed or variable death benefits and policy loan provisions among others.
Whole Life Insurance:
Whole life insurance is also referred to as ordinary life. This the most common type of permanent life insurance. It provides the certainty of a guaranteed amount of death benefit and a guaranteed rate of return on cash values. The premium is also level and guaranteed to never increase. Some types of whole life insurance policies allow policy owners to participate in the financial prosperity of the insurance company by receiving dividends. Dividends can by used to grow the death benefit and/or the cash value of the policy.
Universal Life Insurance:
Universal life insurance is also referred to as adjustable life insurance. It allows policy owners to pay premiums at any time, in virtually any amount, subject to certain minimums and maximums. Policy owners can also reduce or increase the death benefit of a universal life insurance policy more easily than with other types of permanent life insurance policies. Universal life insurance policies provide the certainty of a guaranteed minimum amount of death benefit, as long as premiums are sufficient to sustain that death benefit. Most universal life insurance policies will also provide a guaranteed rate of return on the policy's cash value. However, it is possible a policy will not accumulate cash value if the insurance company's administrative expenses increase, mortality assumptions are changed, investment portfolio does not perform as expected, or the policy premium payments are insufficient.
Variable Life Insurance:
Variable life insurance provides death benefits and cash values that vary with the performance of a portfolio of underlying investment options. Policy owners can allocate a portion of premiums among a variety of investment options such as stocks, bonds and mutual funds. Fixed accounts with guaranteed interest rates are also an option. Variable life insurance may be a good option for people who are willing to assume investment risk in an effort to achieve greater returns. With variable life insurance, much of the investment risk is shifted from the insurance company to the policy owner. Good investment performance would provide the potential for higher cash values and death benefits. If the specified investments perform poorly, cash values and death benefits would drop accordingly.
Variable Universal Life Insurance:
Variable universal life insurance is similar to universal life insurance. It is a flexible premium, permanent life insurance policy that allows policy owners to have premium dollars allocated to a variety of investment options, including a fixed account. The policy allows for changes to the death benefit and policy premium. Variable universal life insurance may be a good option for people who want to combine life insurance with a higher potential for investment return at a higher risk.
Included Features vs. Available Options (Riders)
Many term life insurance policies include specific features with the policy that do not require additional premium. QuickQuote refers to these throughout the Web site as 'Included Features'.
An example of a common Included Feature is the Accelerated Death Benefit provision. This provision typically allows for the one-time acceleration or advance of up to 50% of the death benefit proceeds payable under the base insurance policy, not to exceed $250,000. An insured may become eligible for this benefit if diagnosed by a qualified physician as having 12 months or fewer to live. Specific requirements and limits vary by company.
Nearly all term life insurance policies in the marketplace offer optional benefits the policy owner can add to the policy for additional premium. These benefits are commonly called optional riders. QuickQuote refers to these throughout the Web site as 'Available Options'.
Examples of common Available Options are:
Accidental Death Benefit Rider: This benefit is optional with many policies today. It provides an additional death benefit when the insured's death is caused by an accident.
Life Insurance Basics Term Life Insurance Permanent Life Insurance Included Features vs. Available Options (Riders) Substandard Ratings
Life Insurance Basics
One simple definition of life insurance states it is coverage placed on the life of an individual whereas an insurance company issues a policy and pays a stated death benefit in the event of the insured's death. Life insurance is intended to provide financial stability and support to the dependents and beneficiaries of the insured.
While the general concept of life insurance seems simple enough, there is nothing simple about the overwhelming number of policy options available in the marketplace today. Our discussion will focus on the two basic types of life insurance: term life insurance and permanent life insurance. We will also briefly describe the most common variations of each type of life insurance.
Term Life Insurance
Term life insurance provides pure life insurance in its most inexpensive form. Term life insurance provides coverage for a set period of time (the policy term) and generally pays a death benefit only if the insured dies during the policy term. The policy term typically ranges from 1 to 30 years, with 20 years being the most common term.
One of the biggest advantages of term life insurance is its lower initial cost in comparison to permanent life insurance. Term life insurance policies have no cash value accounts, policy loan provisions or other features typically found in permanent life insurance policies. With term life policies, you're generally just paying for the death benefit, which is the lump sum payment your beneficiaries will receive if you die during the term of the policy. With most permanent life policies, your premiums help fund the death benefit and can accumulate cash value.
Term life insurance is often a good choice for people in their family-formation years, especially if they're on a tight budget. It allows an individual to buy high levels of coverage when the need for protection is often greatest. Term life insurance is also a good option for covering needs that will disappear in time. For instance, if paying for a child's education is an applicant's major financial goal, it would be wise for the applicant to purchase a term life insurance policy that will cover the period of time necessary to reach that goal.
Level Premium Term Life Insurance:
Level premium term life insurance offers fully-guaranteed premium rates, which means the premiums on the policy are guaranteed to remain the same for the entire term period. Level premium term life insurance is a fully-underwritten product and is available in amounts as low as $50,000 up to $20 million or more, depending on the insurance company. It is the most common form of term life insurance.
Return of Premium (ROP) Term Life Insurance:
Return of Premium (ROP) term life insurance is a relatively new product that combines the advantages of traditional term life insurance such as affordable, guaranteed level premium periods (10, 20 or 30 years), with a return of premium feature. At the end of the level premium period, 100% of the premiums paid will be returned to the policy owner (excluding substandard fees and any extra charges).
Of course, there is a price to be paid for this added benefit. The premiums for ROP policies are higher than premiums for standard term life policies. The insurance company will generally invest these additional premium dollars during the term of the policy, which allows them to return your premiums to you at the end of the term period.
One factor to consider is term life insurance rates have dropped considerably over the past decade, mostly because people are living longer. If you own a standard term life policy, there's really no harm done in dropping that policy in favor of a newer and cheaper term life policy. But if you own a ROP policy, dropping the policy before the full term has expired means that you will have paid a high price for your life insurance coverage and the premiums you've paid may only be partially refunded.
Instant Issue Term Life Insurance:
This revolutionary product combines the advantages of traditional term life insurance such as affordable, guaranteed level-premium periods, with the speed and simplicity of the Internet. Policies are generally issued in as little as 15 minutes with no medical exams and no lengthy underwriting.
Qualified applicants can currently select coverage amounts from as low as $25,000 to $150,000 and coverage periods of 10, 15, or 20 years. A convenient online application allows the applicant to sign digitally through e-signature. There are no forms to fill out or mail. Once approved, the applicant is asked to set up an online account for payment processing and a policy is issued electronically.
Permanent Life Insurance:
Permanent life insurance provides lifelong protection. As long as the premiums are paid, the policy will stay in force until a death benefit is paid. These policies are designed and priced to keep over a long period of time. They are generally recommended for people who believe they will have a lifelong need for life insurance coverage or for coverage that extends beyond the maximum allowed by term life insurance (currently 30 years).
Another characteristic of permanent life insurance is a feature known as cash value or cash-surrender value. In fact, permanent life insurance is often referred to as cash value life insurance because these types of policies can build cash value over time, as well as provide a death benefit to the beneficiaries.
Cash values, which accumulate on a tax-deferred basis just like assets in most retirement plans, can be used in the future for any nearly any purpose. Policy owners can borrow cash value for a down payment on a home, to help pay for their children's education or to provide income for retirement. When money is borrowed from a permanent life insurance policy, the policy's cash value is used as collateral and the borrowing rates tend to be relatively low. And unlike loans from most financial institutions, the loan is not dependent on credit checks or other restrictions. The loan must ultimately be paid back with interest or the beneficiaries will receive a reduced death benefit and cash surrender value.
If the policy owner needs or wants to stop paying premiums, the cash value can be used to continue the current life insurance protection for a specified time, or to provide a lesser amount of protection for the remainder of the policy. If the policy owner decides to stop paying premiums and surrenders the policy, the guaranteed policy values will be paid to him/her.
There are several types of permanent life insurance policies available including whole life, universal life and variable life. Each offers its own set of options and features including fixed or variable premiums, fixed or variable death benefits and policy loan provisions among others.
Whole Life Insurance:
Whole life insurance is also referred to as ordinary life. This the most common type of permanent life insurance. It provides the certainty of a guaranteed amount of death benefit and a guaranteed rate of return on cash values. The premium is also level and guaranteed to never increase. Some types of whole life insurance policies allow policy owners to participate in the financial prosperity of the insurance company by receiving dividends. Dividends can by used to grow the death benefit and/or the cash value of the policy.
Universal Life Insurance:
Universal life insurance is also referred to as adjustable life insurance. It allows policy owners to pay premiums at any time, in virtually any amount, subject to certain minimums and maximums. Policy owners can also reduce or increase the death benefit of a universal life insurance policy more easily than with other types of permanent life insurance policies. Universal life insurance policies provide the certainty of a guaranteed minimum amount of death benefit, as long as premiums are sufficient to sustain that death benefit. Most universal life insurance policies will also provide a guaranteed rate of return on the policy's cash value. However, it is possible a policy will not accumulate cash value if the insurance company's administrative expenses increase, mortality assumptions are changed, investment portfolio does not perform as expected, or the policy premium payments are insufficient.
Variable Life Insurance:
Variable life insurance provides death benefits and cash values that vary with the performance of a portfolio of underlying investment options. Policy owners can allocate a portion of premiums among a variety of investment options such as stocks, bonds and mutual funds. Fixed accounts with guaranteed interest rates are also an option. Variable life insurance may be a good option for people who are willing to assume investment risk in an effort to achieve greater returns. With variable life insurance, much of the investment risk is shifted from the insurance company to the policy owner. Good investment performance would provide the potential for higher cash values and death benefits. If the specified investments perform poorly, cash values and death benefits would drop accordingly.
Variable Universal Life Insurance:
Variable universal life insurance is similar to universal life insurance. It is a flexible premium, permanent life insurance policy that allows policy owners to have premium dollars allocated to a variety of investment options, including a fixed account. The policy allows for changes to the death benefit and policy premium. Variable universal life insurance may be a good option for people who want to combine life insurance with a higher potential for investment return at a higher risk.
Included Features vs. Available Options (Riders)
Many term life insurance policies include specific features with the policy that do not require additional premium. QuickQuote refers to these throughout the Web site as 'Included Features'.
An example of a common Included Feature is the Accelerated Death Benefit provision. This provision typically allows for the one-time acceleration or advance of up to 50% of the death benefit proceeds payable under the base insurance policy, not to exceed $250,000. An insured may become eligible for this benefit if diagnosed by a qualified physician as having 12 months or fewer to live. Specific requirements and limits vary by company.
Nearly all term life insurance policies in the marketplace offer optional benefits the policy owner can add to the policy for additional premium. These benefits are commonly called optional riders. QuickQuote refers to these throughout the Web site as 'Available Options'.
Examples of common Available Options are:
Accidental Death Benefit Rider: This benefit is optional with many policies today. It provides an additional death benefit when the insured's death is caused by an accident.
Tuesday, August 7, 2007
Insurance companies
Types of insurance companies
Insurance companies may be classified as
Life insurance companies, which sell life insurance, annuities and pensions products.
Non-life or general insurance companies, which sell other types of insurance.
General insurance companies can be further divided into these sub categories.
Standard Lines
Excess Lines
In most countries, life and non-life insurers are subject to different regulatory regimes and different tax and accounting rules. The main reason for the distinction between the two types of company is that life, annuity, and pension business is very long-term in nature — coverage for life assurance or a pension can cover risks over many decades. By contrast, non-life insurance cover usually covers a shorter period, such as one year.
In the United States, standard line insurance companies are your "main stream" insurers. These are the companies that typically insure your auto, home or business. They use pattern or "cookie cutter" policies without variation from one person to the next. They usually have lower premiums than excess lines and can sell directly to individuals. They are regulated by state laws that can restrict the amount they can charge for insurance policies.
Excess line insurance companies (aka Excess and Surplus) typically insure risks not covered by the standard lines market. They are broadly referred as being all insurance placed with non-admitted insurers. Non-admitted insurers are not licenced in the states where the risks are located. These companies have more flexibility and can react faster than standard insurance companies because they don't have the same regulations as standard insurance companies. State laws generally require insurance placed with surplus line agents and brokers to not be available through standard licensed insurers.
Insurance companies are generally classified as either mutual or stock companies. This is more of a traditional distinction as true mutual companies are becoming rare. Mutual companies are owned by the policyholders, while stockholders (who may or may not own policies) own stock insurance companies. Other possible forms for an insurance company include reciprocals, in which policyholders 'reciprocate' in sharing risks, and lloyds organizations.
Insurance companies are rated by various agencies such as A.M. Best. The ratings include the company's financial strength, which measures its ability to pay claims. It also rates financial instruments issued by the insurance company, such as bonds, notes, and securitization products.
Reinsurance companies are insurance companies that sell policies to other insurance companies, allowing them to reduce their risks and protect themselves from very large losses. The reinsurance market is dominated by a few very large companies, with huge reserves. A reinsurer may also be a direct writer of insurance risks as well.
Captive insurance companies may be defined as limited-purpose insurance companies established with the specific objective of financing risks emanating from their parent group or groups. This definition can sometimes be extended to include some of the risks of the parent company's customers. In short, it is an in-house self-insurance vehicle. Captives may take the form of a "pure" entity (which is a 100% subsidiary of the self-insured parent company); of a "mutual" captive (which insures the collective risks of members of an industry); and of an "association" captive (which self-insures individual risks of the members of a professional, commercial or industrial association). Captives represent commercial, economic and tax advantages to their sponsors because of the reductions in costs they help create and for the ease of insurance risk management and the flexibility for cash flows they generate. Additionally, they may provide coverage of risks which is neither available nor offered in the traditional insurance market at reasonable prices.
The types of risk that a captive can underwrite for their parents include property damage, public and products liability, professional indemnity, employee benefits, employers liability, motor and medical aid expenses. The captive's exposure to such risks may be limited by the use of reinsurance.
Captives are becoming an increasingly important component of the risk management and risk financing strategy of their parent. This can be understood against the following background:
heavy and increasing premium costs in almost every line of coverage;
difficulties in insuring certain types of fortuitous risk;
differential coverage standards in various parts of the world;
rating structures which reflect market trends rather than individual loss experience;
insufficient credit for deductibles and/or loss control efforts.
There are also companies known as 'insurance consultants'. Like a mortgage broker, these companies are paid a fee by the customer to shop around for the best insurance policy amongst many companies .
Similar to an insurance consultant, an 'insurance broker' also shops around for the best insurance policy amongst many companies. However, with insurance brokers, the fee is usually paid in the form of commission from the insurer that is selected rather than directly from the client.
Neither insurance consultants nor insurance brokers are insurance companies and no risks are transferred to them in insurance transactions.
Third party administrators are companies that perform underwriting and sometimes claims handling services for insurance companies. These companies often have special expertise that the insurance companies do not have.
Life insurance and saving
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. See life insurance.
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.
Size of global insurance industry
Life insurance premia written in 2005
Non-life insurance premia written in 2005
Global insurance premiums grew by 9.7% in 2004 to reach $3.3 trillion. This follows 11.7% growth in the previous year. Life insurance premiums grew by 9.8% during the year, thanks to rising demand for annuity and pension products. Non-life insurance premiums grew by 9.4%, as premium rates increased. Over the past decade, global insurance premiums rose by more than a half as annual growth fluctuated between 2% and 10%.
Advanced economies account for the bulk of global insurance. With premium income of $1,217 billion in 2004, North America was the most important region, followed by the EU (at $1,198 billion) and Japan (at $492 billion). The top four countries accounted for nearly two-thirds of premiums in 2004. The United States and Japan alone accounted for a half of world insurance premiums, much higher than their 7% share of the global population. Emerging markets accounted for over 85% of the world’s population but generated only 10% of premiums. The volume of UK insurance business totaled $295 billion in 2004 or 9.1% of global premiums.
Financial viability of insurance companies
Financial stability and strength of an insurance company should be a major consideration when purchasing an insurance contract. An insurance premium paid currently provides coverage for losses that might arise many years in the future. For that reason, the viability of the insurance carrier is very important. In recent years, a number of insurance companies have become insolvent, leaving their policyholders with no coverage (or coverage only from a government-backed insurance pool or other arrangement with less attractive payouts for losses). A number of independent rating agencies, such as Best's, Fitch, Standard & Poor's, and Moody's Investors Service, provide information and rate the financial viability of insurance companies.
Controversies
Insurance insulates too much
By creating a "security blanket" for its insureds, an insurance company may inadvertently find that its insureds may not be as risk-averse as they might otherwise be (since, by definition, the insured has transferred the risk to the insurer). This problem is known to the insurance industry as moral hazard. To reduce their own financial exposure, insurance companies have contractual clauses that mitigate their obligation to provide coverage if the insured engages in behavior that grossly magnifies their risk of loss or liability.
For example, life insurance companies may require higher premiums or deny coverage altogether to people who work in hazardous occupations or engage in dangerous sports. Liability insurance providers do not provide coverage for liability arising from intentional torts committed by the insured. Even if a provider were so irrational as to desire to provide such coverage, it is against the public policy of most countries to allow such insurance to exist, and thus it is usually illegal.
Closed community self-insurance
Some communities prefer to create virtual insurance amongst themselves by other means than contractual risk transfer, which assigns explicit numerical values to risk. A number of religious groups, including the Amish and some Muslim groups, depend on support provided by their communities when disasters strike. The risk presented by any given person is assumed collectively by the community who all bear the cost of rebuilding lost property and supporting people whose needs are suddenly greater after a loss of some kind. In supportive communities where others can be trusted to follow community leaders, this tacit form of insurance can work. In this manner the community can even out the extreme differences in insurability that exist among its members. Some further justification is also provided by invoking the moral hazard of explicit insurance contracts.
In the United Kingdom The Crown (which, for practical purposes, meant the Civil service) did not insure property such as government buildings. If a government building was damaged, the cost of repair would be met from public funds because, in the long run, this was cheaper than paying insurance premiums. Since many UK government buildings have been sold to property companies, and rented back, this arrangement is now less common and may have disappeared altogether.
Complexity of insurance policy contracts
Insurance policies can be complex and some policyholders may not understand all the fees and coverages included in a policy. As a result, people may buy policies on unfavorable terms. In response to these issues, many countries have enacted detailed statutory and regulatory regimes governing every aspect of the insurance business, including minimum standards for policies and the ways in which they may be advertised and sold.
Many institutional insurance purchasers buy insurance through an insurance broker. Brokers represent the buyer (not the insurance company), and typically counsel the buyer on appropriate coverages, policy limitations. A broker generally holds contracts with many insurers, thereby allowing the broker to "shop" the market for the best rates and coverage possible.
Insurance may also be purchased through an agent. Unlike a broker, who represents the policyholder, an agent represents the insurance company from whom the policyholder buys. An agent can represent more than one company.
Redlining
Redlining is the practice of denying insurance coverage in specific geographic areas, purportedly because of a high likelihood of loss, while the alleged motivation is unlawful discrimination.
In determining premiums and premium rate structures, insurers consider quantifiable factors, including location, credit scores, gender, occupation, marital status, and education level. However, the use of such factors is often considered to be unfair or unlawfully discriminatory, and the reaction against this practice has in some instances led to political disputes about the ways in which insurers determine premiums and regulatory intervention to limit the factors used.
An insurance underwriter's job is to evaluate a given risk as to the likelihood that a loss will occur. Any factor that causes a greater likelihood of loss should theoretically be charged a higher rate. This basic principle of insurance must be followed if insurance companies are to remain solvent. Thus, "discrimination" against (i.e., differential treatment of) potential insureds in the risk evaluation and premium-setting process is a necessary by-product of the fundamentals of insurance underwriting. For instance, insurers charge older people significantly higher premiums than they charge younger people for term life insurance. Older people are thus treated differently than younger people (i.e., a distinction is made, discrimination occurs). The rationale for the differential treatment goes to the heart of the risk a life insurer takes: Old people are likely to die sooner than young people, so the risk of loss (the insured's death) is greater in any given period of time and therefore the risk premium must be higher to cover the greater risk. However, treating insureds differently when there is no actuarially sound reason for doing so is unlawful discrimination.
What is often missing from the debate is that prohibiting the use of legitimate, actuarially sound factors means that an insufficient amount is being charged for a given risk, and there is thus a deficit in the system. The failure to address the deficit may mean insolvency and hardship for all of a company's insureds. The options for addressing the deficit seem to be the following: Charge the deficit to the other policyholders or charge it to the government (i.e., externalize outside of the company to society at large).
Health insurance
Health insurance, which is coverage for individuals to protect them against medical costs, is a highly charged and political issue in the United States, which does not have socialized health coverage. In theory, the market for health insurance should function in a manner similar to other insurance coverages, but the skyrocketing cost of health coverage has disrupted markets around the globe, but perhaps most glaringly in the U.S. See health insurance.
Dental insurance
Dental insurance, like health 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.
Insurance patents
See insurance patent for more details.
New insurance products can now be protected from copying with a business method patent in the United States.
A recent example of a new insurance product that is patented is telematic auto insurance. It was independently invented and patented by a major U.S. auto insurance company, Progressive Auto Insurance (U.S. Patent 5,797,134 ) and a Spanish independent inventor, Salvador Minguijon Perez (EP patent 0700009).
The basic idea of telematic auto insurance is that a driver's behavior is monitored directly while he or she drives and the information is transmitted to the insurance company. The insurance company uses the information to assess the likelihood that a driver will have an accident and adjusts premiums accordingly. A driver who drives great distances at high speeds, for example, might be charged a different rate than a driver who drives short distances at low speeds. The precise effect on charges is not known as it is not clear that a high speed long distance driver incurs greater risk to an insurance pool than the slow around-town driver.[citation needed]
A British auto insurance company, Norwich Union, has obtained a license to both the Progressive patent and Perez patent. They have made investments in infrastructure and developed a commercial offering called "Pay As You Drive" or PAYD.
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.
The insurance industry and rent seeking
Certain insurance products and practices have been described as rent seeking by critics. That is, some insurance products or practices are useful primarily because of legal benefits, such as reducing taxes, as opposed to providing protection against risks of adverse events. Under United States tax law, for example, most owners of variable annuities and variable life insurance can invest their premium payments in the stock market and defer or eliminate paying any taxes on their investments until withdrawals are made. Sometimes this tax deferral is the only reason people use these products. Another example is the legal infrastructure which allows life insurance to be held in an irrevocable trust which is used to pay an estate tax while the proceeds themselves are immune from the estate tax.
Criticism of insurance companies
Some people believe that modern insurance companies are money-making businesses which have little interest in insurance. They argue that the purpose of insurance is to spread risk so the reluctance of insurance companies to take on high-risk cases (e.g. houses in areas subject to flooding, or young drivers) runs counter to the principle of insurance.
Other criticisms include:
Insurance policies contain too many exclusion clauses. For example, some house insurance policies do not cover damage to garden walls.
Most insurance companies now use call centres and staff attempt to answer questions by reading from a script. It is difficult to speak to anybody with expert knowledge.
Insurance companies may be classified as
Life insurance companies, which sell life insurance, annuities and pensions products.
Non-life or general insurance companies, which sell other types of insurance.
General insurance companies can be further divided into these sub categories.
Standard Lines
Excess Lines
In most countries, life and non-life insurers are subject to different regulatory regimes and different tax and accounting rules. The main reason for the distinction between the two types of company is that life, annuity, and pension business is very long-term in nature — coverage for life assurance or a pension can cover risks over many decades. By contrast, non-life insurance cover usually covers a shorter period, such as one year.
In the United States, standard line insurance companies are your "main stream" insurers. These are the companies that typically insure your auto, home or business. They use pattern or "cookie cutter" policies without variation from one person to the next. They usually have lower premiums than excess lines and can sell directly to individuals. They are regulated by state laws that can restrict the amount they can charge for insurance policies.
Excess line insurance companies (aka Excess and Surplus) typically insure risks not covered by the standard lines market. They are broadly referred as being all insurance placed with non-admitted insurers. Non-admitted insurers are not licenced in the states where the risks are located. These companies have more flexibility and can react faster than standard insurance companies because they don't have the same regulations as standard insurance companies. State laws generally require insurance placed with surplus line agents and brokers to not be available through standard licensed insurers.
Insurance companies are generally classified as either mutual or stock companies. This is more of a traditional distinction as true mutual companies are becoming rare. Mutual companies are owned by the policyholders, while stockholders (who may or may not own policies) own stock insurance companies. Other possible forms for an insurance company include reciprocals, in which policyholders 'reciprocate' in sharing risks, and lloyds organizations.
Insurance companies are rated by various agencies such as A.M. Best. The ratings include the company's financial strength, which measures its ability to pay claims. It also rates financial instruments issued by the insurance company, such as bonds, notes, and securitization products.
Reinsurance companies are insurance companies that sell policies to other insurance companies, allowing them to reduce their risks and protect themselves from very large losses. The reinsurance market is dominated by a few very large companies, with huge reserves. A reinsurer may also be a direct writer of insurance risks as well.
Captive insurance companies may be defined as limited-purpose insurance companies established with the specific objective of financing risks emanating from their parent group or groups. This definition can sometimes be extended to include some of the risks of the parent company's customers. In short, it is an in-house self-insurance vehicle. Captives may take the form of a "pure" entity (which is a 100% subsidiary of the self-insured parent company); of a "mutual" captive (which insures the collective risks of members of an industry); and of an "association" captive (which self-insures individual risks of the members of a professional, commercial or industrial association). Captives represent commercial, economic and tax advantages to their sponsors because of the reductions in costs they help create and for the ease of insurance risk management and the flexibility for cash flows they generate. Additionally, they may provide coverage of risks which is neither available nor offered in the traditional insurance market at reasonable prices.
The types of risk that a captive can underwrite for their parents include property damage, public and products liability, professional indemnity, employee benefits, employers liability, motor and medical aid expenses. The captive's exposure to such risks may be limited by the use of reinsurance.
Captives are becoming an increasingly important component of the risk management and risk financing strategy of their parent. This can be understood against the following background:
heavy and increasing premium costs in almost every line of coverage;
difficulties in insuring certain types of fortuitous risk;
differential coverage standards in various parts of the world;
rating structures which reflect market trends rather than individual loss experience;
insufficient credit for deductibles and/or loss control efforts.
There are also companies known as 'insurance consultants'. Like a mortgage broker, these companies are paid a fee by the customer to shop around for the best insurance policy amongst many companies .
Similar to an insurance consultant, an 'insurance broker' also shops around for the best insurance policy amongst many companies. However, with insurance brokers, the fee is usually paid in the form of commission from the insurer that is selected rather than directly from the client.
Neither insurance consultants nor insurance brokers are insurance companies and no risks are transferred to them in insurance transactions.
Third party administrators are companies that perform underwriting and sometimes claims handling services for insurance companies. These companies often have special expertise that the insurance companies do not have.
Life insurance and saving
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. See life insurance.
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.
Size of global insurance industry
Life insurance premia written in 2005
Non-life insurance premia written in 2005
Global insurance premiums grew by 9.7% in 2004 to reach $3.3 trillion. This follows 11.7% growth in the previous year. Life insurance premiums grew by 9.8% during the year, thanks to rising demand for annuity and pension products. Non-life insurance premiums grew by 9.4%, as premium rates increased. Over the past decade, global insurance premiums rose by more than a half as annual growth fluctuated between 2% and 10%.
Advanced economies account for the bulk of global insurance. With premium income of $1,217 billion in 2004, North America was the most important region, followed by the EU (at $1,198 billion) and Japan (at $492 billion). The top four countries accounted for nearly two-thirds of premiums in 2004. The United States and Japan alone accounted for a half of world insurance premiums, much higher than their 7% share of the global population. Emerging markets accounted for over 85% of the world’s population but generated only 10% of premiums. The volume of UK insurance business totaled $295 billion in 2004 or 9.1% of global premiums.
Financial viability of insurance companies
Financial stability and strength of an insurance company should be a major consideration when purchasing an insurance contract. An insurance premium paid currently provides coverage for losses that might arise many years in the future. For that reason, the viability of the insurance carrier is very important. In recent years, a number of insurance companies have become insolvent, leaving their policyholders with no coverage (or coverage only from a government-backed insurance pool or other arrangement with less attractive payouts for losses). A number of independent rating agencies, such as Best's, Fitch, Standard & Poor's, and Moody's Investors Service, provide information and rate the financial viability of insurance companies.
Controversies
Insurance insulates too much
By creating a "security blanket" for its insureds, an insurance company may inadvertently find that its insureds may not be as risk-averse as they might otherwise be (since, by definition, the insured has transferred the risk to the insurer). This problem is known to the insurance industry as moral hazard. To reduce their own financial exposure, insurance companies have contractual clauses that mitigate their obligation to provide coverage if the insured engages in behavior that grossly magnifies their risk of loss or liability.
For example, life insurance companies may require higher premiums or deny coverage altogether to people who work in hazardous occupations or engage in dangerous sports. Liability insurance providers do not provide coverage for liability arising from intentional torts committed by the insured. Even if a provider were so irrational as to desire to provide such coverage, it is against the public policy of most countries to allow such insurance to exist, and thus it is usually illegal.
Closed community self-insurance
Some communities prefer to create virtual insurance amongst themselves by other means than contractual risk transfer, which assigns explicit numerical values to risk. A number of religious groups, including the Amish and some Muslim groups, depend on support provided by their communities when disasters strike. The risk presented by any given person is assumed collectively by the community who all bear the cost of rebuilding lost property and supporting people whose needs are suddenly greater after a loss of some kind. In supportive communities where others can be trusted to follow community leaders, this tacit form of insurance can work. In this manner the community can even out the extreme differences in insurability that exist among its members. Some further justification is also provided by invoking the moral hazard of explicit insurance contracts.
In the United Kingdom The Crown (which, for practical purposes, meant the Civil service) did not insure property such as government buildings. If a government building was damaged, the cost of repair would be met from public funds because, in the long run, this was cheaper than paying insurance premiums. Since many UK government buildings have been sold to property companies, and rented back, this arrangement is now less common and may have disappeared altogether.
Complexity of insurance policy contracts
Insurance policies can be complex and some policyholders may not understand all the fees and coverages included in a policy. As a result, people may buy policies on unfavorable terms. In response to these issues, many countries have enacted detailed statutory and regulatory regimes governing every aspect of the insurance business, including minimum standards for policies and the ways in which they may be advertised and sold.
Many institutional insurance purchasers buy insurance through an insurance broker. Brokers represent the buyer (not the insurance company), and typically counsel the buyer on appropriate coverages, policy limitations. A broker generally holds contracts with many insurers, thereby allowing the broker to "shop" the market for the best rates and coverage possible.
Insurance may also be purchased through an agent. Unlike a broker, who represents the policyholder, an agent represents the insurance company from whom the policyholder buys. An agent can represent more than one company.
Redlining
Redlining is the practice of denying insurance coverage in specific geographic areas, purportedly because of a high likelihood of loss, while the alleged motivation is unlawful discrimination.
In determining premiums and premium rate structures, insurers consider quantifiable factors, including location, credit scores, gender, occupation, marital status, and education level. However, the use of such factors is often considered to be unfair or unlawfully discriminatory, and the reaction against this practice has in some instances led to political disputes about the ways in which insurers determine premiums and regulatory intervention to limit the factors used.
An insurance underwriter's job is to evaluate a given risk as to the likelihood that a loss will occur. Any factor that causes a greater likelihood of loss should theoretically be charged a higher rate. This basic principle of insurance must be followed if insurance companies are to remain solvent. Thus, "discrimination" against (i.e., differential treatment of) potential insureds in the risk evaluation and premium-setting process is a necessary by-product of the fundamentals of insurance underwriting. For instance, insurers charge older people significantly higher premiums than they charge younger people for term life insurance. Older people are thus treated differently than younger people (i.e., a distinction is made, discrimination occurs). The rationale for the differential treatment goes to the heart of the risk a life insurer takes: Old people are likely to die sooner than young people, so the risk of loss (the insured's death) is greater in any given period of time and therefore the risk premium must be higher to cover the greater risk. However, treating insureds differently when there is no actuarially sound reason for doing so is unlawful discrimination.
What is often missing from the debate is that prohibiting the use of legitimate, actuarially sound factors means that an insufficient amount is being charged for a given risk, and there is thus a deficit in the system. The failure to address the deficit may mean insolvency and hardship for all of a company's insureds. The options for addressing the deficit seem to be the following: Charge the deficit to the other policyholders or charge it to the government (i.e., externalize outside of the company to society at large).
Health insurance
Health insurance, which is coverage for individuals to protect them against medical costs, is a highly charged and political issue in the United States, which does not have socialized health coverage. In theory, the market for health insurance should function in a manner similar to other insurance coverages, but the skyrocketing cost of health coverage has disrupted markets around the globe, but perhaps most glaringly in the U.S. See health insurance.
Dental insurance
Dental insurance, like health 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.
Insurance patents
See insurance patent for more details.
New insurance products can now be protected from copying with a business method patent in the United States.
A recent example of a new insurance product that is patented is telematic auto insurance. It was independently invented and patented by a major U.S. auto insurance company, Progressive Auto Insurance (U.S. Patent 5,797,134 ) and a Spanish independent inventor, Salvador Minguijon Perez (EP patent 0700009).
The basic idea of telematic auto insurance is that a driver's behavior is monitored directly while he or she drives and the information is transmitted to the insurance company. The insurance company uses the information to assess the likelihood that a driver will have an accident and adjusts premiums accordingly. A driver who drives great distances at high speeds, for example, might be charged a different rate than a driver who drives short distances at low speeds. The precise effect on charges is not known as it is not clear that a high speed long distance driver incurs greater risk to an insurance pool than the slow around-town driver.[citation needed]
A British auto insurance company, Norwich Union, has obtained a license to both the Progressive patent and Perez patent. They have made investments in infrastructure and developed a commercial offering called "Pay As You Drive" or PAYD.
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.
The insurance industry and rent seeking
Certain insurance products and practices have been described as rent seeking by critics. That is, some insurance products or practices are useful primarily because of legal benefits, such as reducing taxes, as opposed to providing protection against risks of adverse events. Under United States tax law, for example, most owners of variable annuities and variable life insurance can invest their premium payments in the stock market and defer or eliminate paying any taxes on their investments until withdrawals are made. Sometimes this tax deferral is the only reason people use these products. Another example is the legal infrastructure which allows life insurance to be held in an irrevocable trust which is used to pay an estate tax while the proceeds themselves are immune from the estate tax.
Criticism of insurance companies
Some people believe that modern insurance companies are money-making businesses which have little interest in insurance. They argue that the purpose of insurance is to spread risk so the reluctance of insurance companies to take on high-risk cases (e.g. houses in areas subject to flooding, or young drivers) runs counter to the principle of insurance.
Other criticisms include:
Insurance policies contain too many exclusion clauses. For example, some house insurance policies do not cover damage to garden walls.
Most insurance companies now use call centres and staff attempt to answer questions by reading from a script. It is difficult to speak to anybody with expert knowledge.
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