Main article: Liability insurance
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.
[edit] Credit
Main article: Credit insurance
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.
[edit] 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.
* Media Insurance is designed to cover professionals that engage in film, video and
TV production.
* Legal Expenses Insurance covers policyholders against the potential costs of legal
action against an institution or an individual.
Tuesday, August 4, 2009
Property
Main article: Property insurance
This tornado damage to an Illinois home would be considered an "Act of God" for
insurance purposes
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.
This tornado damage to an Illinois home would be considered an "Act of God" for
insurance purposes
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.
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.[9]
Auto insurance
Main article: Vehicle insurance
A wrecked vehicle
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 comprises six 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. [10]
Home insurance
Main article: 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.[11]
Health
Main articles: Health insurance and Dental insurance
NHS Facility
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.
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.[9]
Auto insurance
Main article: Vehicle insurance
A wrecked vehicle
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 comprises six 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. [10]
Home insurance
Main article: 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.[11]
Health
Main articles: Health insurance and Dental insurance
NHS Facility
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.
History of insurance
Main article: 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 or lost at sea.
Achaemenian monarchs of Ancient Persia 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.
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 or lost at sea.
Achaemenian monarchs of Ancient Persia 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
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.
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.
Underwriting and investing
Underwriting and investing
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;
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); insurance companies essentially
use actuarial science to attempt to underwrite enough "winning" policies to pay out on
the "losers" while still maintaining profitability.
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.
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;
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); insurance companies essentially
use actuarial science to attempt to underwrite enough "winning" policies to pay out on
the "losers" while still maintaining profitability.
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.
Indemnity
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.
Economics aims to explain how economies work and how economic agents interact. Economic analysis is applied throughout society, in business, finance and government, but also in crime,[4] education,[5] the family, health, law, politics, religion,[6] social institutions, war,[7] and science.[8] The expanding domain of economics in the social sciences has been described as economic imperialism.[9][10] Common distinctions are drawn between various dimensions of economics: between positive economics (describing "what is") and normative economics (advocating "what ought to be") or between economic theory and applied economics or between mainstream economics (more "orthodox" dealing with the "rationality-individualism-equilibrium nexus") and heterodox economics (more "radical" dealing with the "institutions-history-social structure nexus"[11]). However the primary textbook distinction is between microeconomics ("small" economics), which examines the economic behavior of agents (including individuals and firms) and macroeconomics ("big" economics), addressing issues of unemployment, inflation, monetary and fiscal policy for an entire economy.
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.
Economics aims to explain how economies work and how economic agents interact. Economic analysis is applied throughout society, in business, finance and government, but also in crime,[4] education,[5] the family, health, law, politics, religion,[6] social institutions, war,[7] and science.[8] The expanding domain of economics in the social sciences has been described as economic imperialism.[9][10] Common distinctions are drawn between various dimensions of economics: between positive economics (describing "what is") and normative economics (advocating "what ought to be") or between economic theory and applied economics or between mainstream economics (more "orthodox" dealing with the "rationality-individualism-equilibrium nexus") and heterodox economics (more "radical" dealing with the "institutions-history-social structure nexus"[11]). However the primary textbook distinction is between microeconomics ("small" economics), which examines the economic behavior of agents (including individuals and firms) and macroeconomics ("big" economics), addressing issues of unemployment, inflation, monetary and fiscal policy for an entire economy.
Economics
Economics is the social science that studies the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek οἰκονομία (oikonomia, "management of a household, administration") from οἶκος (oikos, "house") + νόμος (nomos, "custom" or "law"), hence "rules of the house(hold)".[1] Current economic models developed out of the broader field of political economy in the late 19th century, owing to a desire to use an empirical approach more akin to the physical sciences.[2] A definition that captures much of modern economics is that of Lionel Robbins in a 1932 essay: "the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses."[3] Scarcity means that available resources are insufficient to satisfy all wants and needs. Absent scarcity and alternative uses of available resources, there is no economic problem. The subject thus defined involves the study of choices as they are affected by incentives and resources.
Commercially insurable risks typically share seven common characteristics.[1]
1. A large number of homogeneous exposure units. The vast majority of insurance policies are provided for individual members of very large classes. Automobile insurance, for example, covered about 175 million automobiles in the United States in 2004.[2] The existence of a large number of homogeneous exposure units allows insurers to benefit from the so-called “law of large numbers,” which in effect states that as the number of exposure units increases, the actual results are increasingly likely to become close to expected results. There are exceptions to this criterion. Lloyd's of London is famous for insuring the life or health of actors, actresses and sports figures. Satellite Launch insurance covers events that are infrequent. Large commercial property policies may insure exceptional properties for which there are no ‘homogeneous’ exposure units. Despite failing on this criterion, many exposures like these are generally considered to be insurable.
2. Definite Loss. The event that gives rise to the loss that is subject to the insured, at least in principle, take place at a known time, in a known place, and from a known cause. The classic example is death of an insured person on a life insurance policy. Fire, automobile accidents, and worker injuries may all easily meet this criterion. Other types of losses may only be definite in theory. Occupational disease, for instance, may involve prolonged exposure to injurious conditions where no specific time, place or cause is identifiable. Ideally, the time, place and cause of a loss should be clear enough that a reasonable person, with sufficient information, could objectively verify all three elements.
3. Accidental Loss. The event that constitutes the trigger of a claim should be fortuitous, or at least outside the control of the beneficiary of the insurance. The loss should be ‘pure,’ in the sense that it results from an event for which there is only the opportunity for cost. Events that contain speculative elements, such as ordinary business risks, are generally not considered insurable.
4. Large Loss. The size of the loss must be meaningful from the perspective of the insured. Insurance premiums need to cover both the expected cost of losses, plus the cost of issuing and administering the policy, adjusting losses, and supplying the capital needed to reasonably assure that the insurer will be able to pay claims. For small losses these latter costs may be several times the size of the expected cost of losses. There is little point in paying such costs unless the protection offered has real value to a buyer.
5. Affordable Premium. If the likelihood of an insured event is so high, or the cost of the event so large, that the resulting premium is large relative to the amount of protection offered, it is not likely that anyone will buy insurance, even if on offer. Further, as the accounting profession formally recognizes in financial accounting standards, the premium cannot be so large that there is not a reasonable chance of a significant loss to the insurer. If there is no such chance of loss, the transaction may have the form of insurance, but not the substance. (See the U.S. Financial Accounting Standards Board standard number 113)
6. Calculable Loss. There are two elements that must be at least estimable, if not formally calculable: the probability of loss, and the attendant cost. Probability of loss is generally an empirical exercise, while cost has more to do with the ability of a reasonable person in possession of a copy of the insurance policy and a proof of loss associated with a claim presented under that policy to make a reasonably definite and objective evaluation of the amount of the loss recoverable as a result of the claim.
7. Limited risk of catastrophically large losses. The essential risk is often aggregation. If the same event can cause losses to numerous policyholders of the same insurer, the ability of that insurer to issue policies becomes constrained, not by factors surrounding the individual characteristics of a given policyholder, but by the factors surrounding the sum of all policyholders so exposed. Typically, insurers prefer to limit their exposure to a loss from a single event to some small portion of their capital base, on the order of 5 percent. Where the loss can be aggregated, or an individual policy could produce exceptionally large claims, the capital constraint will restrict an insurer's appetite for additional policyholders. The classic example is earthquake insurance, where the ability of an underwriter to issue a new policy depends on the number and size of the policies that it has already underwritten. Wind insurance in hurricane zones, particularly along coast lines, is another example of this phenomenon. In extreme cases, the aggregation can affect the entire industry, since the combined capital of insurers and reinsurers can be small compared to the needs of potential policyholders in areas exposed to aggregation risk. In commercial fire insurance it is possible to find single properties whose total exposed value is well in excess of any individual insurer’s capital constraint. Such properties are generally shared among several insurers, or are insured by a single insurer who syndicates the risk into the reinsurance market.
Commercially insurable risks typically share seven common characteristics.[1]
1. A large number of homogeneous exposure units. The vast majority of insurance policies are provided for individual members of very large classes. Automobile insurance, for example, covered about 175 million automobiles in the United States in 2004.[2] The existence of a large number of homogeneous exposure units allows insurers to benefit from the so-called “law of large numbers,” which in effect states that as the number of exposure units increases, the actual results are increasingly likely to become close to expected results. There are exceptions to this criterion. Lloyd's of London is famous for insuring the life or health of actors, actresses and sports figures. Satellite Launch insurance covers events that are infrequent. Large commercial property policies may insure exceptional properties for which there are no ‘homogeneous’ exposure units. Despite failing on this criterion, many exposures like these are generally considered to be insurable.
2. Definite Loss. The event that gives rise to the loss that is subject to the insured, at least in principle, take place at a known time, in a known place, and from a known cause. The classic example is death of an insured person on a life insurance policy. Fire, automobile accidents, and worker injuries may all easily meet this criterion. Other types of losses may only be definite in theory. Occupational disease, for instance, may involve prolonged exposure to injurious conditions where no specific time, place or cause is identifiable. Ideally, the time, place and cause of a loss should be clear enough that a reasonable person, with sufficient information, could objectively verify all three elements.
3. Accidental Loss. The event that constitutes the trigger of a claim should be fortuitous, or at least outside the control of the beneficiary of the insurance. The loss should be ‘pure,’ in the sense that it results from an event for which there is only the opportunity for cost. Events that contain speculative elements, such as ordinary business risks, are generally not considered insurable.
4. Large Loss. The size of the loss must be meaningful from the perspective of the insured. Insurance premiums need to cover both the expected cost of losses, plus the cost of issuing and administering the policy, adjusting losses, and supplying the capital needed to reasonably assure that the insurer will be able to pay claims. For small losses these latter costs may be several times the size of the expected cost of losses. There is little point in paying such costs unless the protection offered has real value to a buyer.
5. Affordable Premium. If the likelihood of an insured event is so high, or the cost of the event so large, that the resulting premium is large relative to the amount of protection offered, it is not likely that anyone will buy insurance, even if on offer. Further, as the accounting profession formally recognizes in financial accounting standards, the premium cannot be so large that there is not a reasonable chance of a significant loss to the insurer. If there is no such chance of loss, the transaction may have the form of insurance, but not the substance. (See the U.S. Financial Accounting Standards Board standard number 113)
6. Calculable Loss. There are two elements that must be at least estimable, if not formally calculable: the probability of loss, and the attendant cost. Probability of loss is generally an empirical exercise, while cost has more to do with the ability of a reasonable person in possession of a copy of the insurance policy and a proof of loss associated with a claim presented under that policy to make a reasonably definite and objective evaluation of the amount of the loss recoverable as a result of the claim.
7. Limited risk of catastrophically large losses. The essential risk is often aggregation. If the same event can cause losses to numerous policyholders of the same insurer, the ability of that insurer to issue policies becomes constrained, not by factors surrounding the individual characteristics of a given policyholder, but by the factors surrounding the sum of all policyholders so exposed. Typically, insurers prefer to limit their exposure to a loss from a single event to some small portion of their capital base, on the order of 5 percent. Where the loss can be aggregated, or an individual policy could produce exceptionally large claims, the capital constraint will restrict an insurer's appetite for additional policyholders. The classic example is earthquake insurance, where the ability of an underwriter to issue a new policy depends on the number and size of the policies that it has already underwritten. Wind insurance in hurricane zones, particularly along coast lines, is another example of this phenomenon. In extreme cases, the aggregation can affect the entire industry, since the combined capital of insurers and reinsurers can be small compared to the needs of potential policyholders in areas exposed to aggregation risk. In commercial fire insurance it is possible to find single properties whose total exposed value is well in excess of any individual insurer’s capital constraint. Such properties are generally shared among several insurers, or are insured by a single insurer who syndicates the risk into the reinsurance market.
Insurance
Insurance, in law and economics, is a form of risk management primarily used to hedge against the risk of a contingent loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium, and can be thought of as a guaranteed small loss to prevent a large, possibly devastating loss. An insurer is a company selling the insurance; an insured or policyholder is the person or entity buying the insurance. The insurance rate is a factor used to determine the amount to be charged for a certain amount of insurance coverage, called the premium. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice.
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