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General 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 potential loss, from one entity to another, in exchange
for a premium. Insurer, in economics, is the company that sells the insurance. Insurance
rate is a factor used to determine the amount, called the premium, to be charged
for a certain amount of insurance coverage. Risk management, the practice of appraising
and controlling risk, has evolved as a discrete field of study and practice.
Commercially insurable risks typically share seven common characteristics.
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A large number of homogeneous exposure units: The vast majority
of insurance policies are provided for individual members of very large classes.
The existence of a large number of homogeneous exposure units allows insurers to
benefit from the so-called “law of large numbers.” There are exceptions
to this criterion. Lloyds 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.
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Definite Loss: The event that gives rise to the loss that is subject
to insurance should, at least in principle, take place at a known time, in a known
place, and from a known cause. Fire, automobile accidents, and worker injuries may
all easily meet this criterion.
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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.
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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.
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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. 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.
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Calculable Loss: There are two elements that must be at least estimatable,
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.
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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%. Where the loss can be aggregated,
or an individual policy could produce exceptionally large claims, the capital constraint
will restrict an insurers 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. |
Indemnification
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 events covered in the policy.
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 is a (non-exhaustive) list of the many different types of insurance that exist.
A single policy may cover risks in one or more of the categories set forth below.
Automobile Insurance: known 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.
Aviation Insurance: insures against hull, spares, deductible, hull
war and liability risks. Boiler insurance insures against accidental physical damage
to equipment or machinery. Contractor’s all risk 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.
Credit Insurance: repays some or all of a loan back when certain
things happen to the borrower such as unemployment, disability, or death. Mortgage
insurance (which see below) 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.
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.
Directors and Officers Liability: insurance protects an organization
(usually a corporation) from costs associated with litigation resulting from mistakes
incurred by directors and officers for which they are liable. In the industry, it
is usually called "D&O" for short.
Errors and Omissions Insurance: See "Professional liability
insurance" under "Liability insurance".
Financial Loss Insurance protects individuals and companies against
various financial risks. For example, a business might purchase cover 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. Fire insurance: See "Property insurance".
Health Insurance policies will often cover the cost of private
medical treatments if the National Health Service in the UK (NHS) or other publicly-funded
health programs do not pay for them. It will often result in quicker health care
where better facilities are available.
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 willful or intentional acts by
the insured.
Professional Liability Insurance, also called professional indemnity
insurance, protects professional practitioners such as architects, lawyers, doctors,
and accountants against potential negligence claims made by their patients/clients.
Professional liability insurance may take on different names depending on the profession.
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.
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.
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.
Workers' Compensation insurance replaces all or part of a worker's
wages lost and accompanying medical expense incurred because of a job-related injury.
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General Insurance
