Insurance

Contents


Introduction
Insurance history
Insurance as the financial protection
Types of insurance
Model of profit making in insurance
Conclusion
Bibliography

Insurance

automobile insurance,
comprehensive insurance,
compulsory insurance,
disability insurance,
endowment insurance,
fire insurance,
flight insurance,
flood insurance,
group insurance,
health insurance,
hurricane insurance,
life insurance,
major-medical insurance,
marine insurance,
motorcar insurance,
no-fault insurance,
private mortgage insurance,
property insurance,
social insurance,
third party insurance,
title insurance,
unemployment insurance,
whole life insurance…
There are a few types of insurance, which are becoming increasingly popular nowadays. Life insurance, for example, is a risk-pooling plan, an economic device through which the risk of premature death is transferred from the individual to the group. However, the contingency insured against has certain characteristics that make it unique; as a result, the contract insuring against the contingency is different in many respects from other types of insurance. The event insured against is an eventual certainty. No one lives forever. Yet life insurance does not violate the requirements of an insurable risk, for it is not the possibility of death itself that is insured, but rather untimely death. The risk in life insurance is not whether the individual is going to die, but when, and the risk increases from year to year. The chance of loss under a life insurance contract is greater the second year of the contract, as far as the company is concerned, than it was the first year, and so on, until the insured eventually dies. Yet, through the mechanism of the law of large numbers, as we shall see, the insurance company can promise to pay a specified sum to the beneficiary no matter when death comes.
There is no possibility of partial loss in life insurance as there is in the case of property and liability insurance. Therefore, all policies are cash payment policies. In the event that a loss occurs, the company will pay the face amount of the policy.
The principle of indemnity applies on a modified basis in the case of life insurance. In most lines of insurance, an attempt is made to put the individual back in exactly the same financial position after a loss as before the loss. For obvious reasons, this is not possible in life insurance. The simple fact of the matter is that we cannot place a value on a human life.
As a legal principle, every contract of insurance must be supported by an insurable interest, but in life insurance, the requirement of insurable interest is applied somewhat differently than in property and liability insurance. When the individual taking out the policy is also the insured, there is no legal problem concerning insurable interest. The courts have held that every individual has an unlimited insurable interest in his or her own life and that a person may assign that insurable interest to anyone. In other words, there is no legal limit to the amount of insurance one may take out on one's own life and no legal limitations as to whom one may name as beneficiary.
The important question of insurable interest arises when the person taking out the insurance is someone other than the person whose life is concerned. In such cases, the law requires that an insurable interest exists at the time the contract is taken out. There are many relationships that provide the basis for an insurable interest. Husbands and wives have an insurable interest in each other; so do partners. A Corporation may have an insurable interest in the life of one of its Executives. In most cases, a parent has an insurable interest in the life of a child, although the extent of this interest may be limited by statute. A creditor has an insurable interest in the life of a debtor, although this too is usually confined by statute to the amount of the debt or slightly more.
Property and credit insurance should be considered as well.
Offered by a number of underwriters in the UK and on the continent, credit insurance policy structure, for instance, protects against the catastrophe risk. Sometimes called "Excess of Loss" or "Stop Loss cover", the underwriting philosophy is centred around the insured's existing in-house credit management controls10.
The insured will agree a "first loss" or non-qualifying loss designed to eliminate predictable lower level losses.
Bad debt losses in excess of this level accumulate within a second pre-
determined band or layer, referred to as the annual aggregate.
A layer of cover is then purchased in excess of this self-insured proportion.
Cover of up to 100% of each qualifying loss in excess of this agreed annual aggregate is available.
The cover is normally fixed up to an agreed ceiling of annual losses, known as the "maximum liability".
This is the more traditional credit insurance policy, normally protecting all sales under a single policy. The policy provides the credit manager with up-to-date financial advice on all principal customers. Generally the insured will self-insure an element of each credit limit. Normally indemnity is 80% - 85%.
At commencement of the policy an assessment is made of turnover likely to be declared under the policy.
The underwriter will agree an annual premium rate charged against such declarations, usually quarterly.
Some insurers now offer pre-delivery cover as an additional element of whole turnover cover. Indemnity is the same as normal credit risk and premium is either charged as an additional rate on turnover or is combined in a single charge.
More companies are now expanding their export business and require a simple, cost effective credit insurance policy which does not automatically provide unnecessary political risk cover. Multi market insurance has been designed to provide cover in a single policy against the risk of non-payment, due to insolvency or protracted default, in the UK and most OECD markets.
All credit risks are covered with 90% indemnity for both UK and export sales. Financial advice is also available on major buyers.
Occasionally one debtor may represent an inordinately large element of a company's turnover. Although one argument suggests that if the buyer is undoubted, then credit insurance cover is not necessary, the catastrophic effect of non-payment, due to unforeseeable or uncontrollable events, would invariably suggest otherwise.
Principal customer cover provides protection against non-payment through insolvency of larger buyers. The benefit of financial advice is available and indemnities vary between 70% - 90%.
This type of cover is sometimes referred to as "Datum Line" cover11.
Insurance companies handling property insurance pay for loss of or damage to the buildings caused by
Fire, Lightning, Explosion or Earthquake;
Smoke, but not loss or damage caused by smog, agricultural or industrial operations or any gradual process;
Riot, Civil Commotion, Labour or Political Disturbance;
Collision with the buildings directly caused by any moving object originating outside your home, but not loss of or damage to hedges, gates or fences by falling trees or branches;
Storm or Flood, but not
loss of or damage to hedges, gates or fences
loss or damage caused by frost
Theft or Attempted Theft, but not
loss or damage by any paying guest or tenant
after your home has been unoccupied for more than 30 consecutive days
Vandalism or Malicious Acts, but not
loss or damage by any paying guest or tenant
after your home has been unoccupied for more than 30 consecutive days
Escape of Water or Oil from any fixed water or heating installation or from any domestic appliance, but not after your home has been unoccupied for more than 30 consecutive days
Subsidence or Heave of the site on which the building of your home stands or Landslip, but not
loss or damage caused by
coastal or river erosion;
demolition, structural repairs or alterations to the buildings
defective design, faulty workmanship or the use of defective
materials in the buildings;
loss of or damage to solid floor slabs resulting from their movement as unless the foundations beneath the external walls of your home are damaged at the same time by the same cause;
loss of or damage to outdoor swimming pools, tennis courts, patios, terraces, service tanks, drains, septic tanks, pipes and cables, central
heating fuel storage tanks, drives, footpaths, garden walls, hedges, to gates or fences unless your home, an outbuilding or garage is damaged at the same time by the same cause;
the amount of the "Subsidence" excess shown in the schedule which will apply to any claim for subsidence or heave or landslip.
Insurance companies pay for damage to any part of the plumbing installation in your home caused by freezing or bursting, but not
if the installation is outside or in an outbuilding;
loss or damage due to rust, corrosion or wear and tear;
after your home has been unoccupied for more than 30 consecutive days;
Service Pipes and Cables
Insurance companies pay for accidental damage for which you are legally responsible to underground drains, pipes, cables and tanks providing services to or from your home.