I walk by a building with a Farmers Insurance office. I have always had car insurance, homeowners’ insurance, renters’ insurance, etc., but I have never been happy about exorbitant premiums. I have a friend who even had plumbing insurance over and above her homeowners’ insurance. She said it was a low premium and made her money back when she had a plumbing emergency. I guess I have always thought of insurance as a necessary evil. I know there are many reputable people employed in the insurance field, and I appreciate their dedication and knowledge. Insurance is a tricky game. I was very glad I had car insurance when I accidentally backed into a car in a parking lot. I was driving an SUV at the time which sits very high and the car I hit was a very low sports car which I couldn’t see out of the back window. The sports car owner refused my insurance company’s offer of compensation and sued me for $100,000! I barely dented his fender. I was very glad to have the insurance companies’ lawyers fight that battle. Let’s find out more about the wide world of insurance.
According to Wikipedia, insurance is a means of protection from financial loss. It is a form of risk management, primarily used to hedge against the risk of a contingent or uncertain loss.
An entity which provides insurance is known as an insurer, an insurance company, an insurance carrier or an underwriter. A person or entity who buys insurance is known as an insured or as a policyholder. The insurance transaction involves the insured assuming a guaranteed and known — relatively small — loss in the form of payment to the insurer in exchange for the insurer's promise to compensate the insured in the event of a covered loss. The loss may or may not be financial, but it must be reducible to financial terms, and usually involves something in which the insured has an insurable interest established by ownership, possession or pre-existing relationship.
The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insurer will compensate the insured. The amount of money charged by the insurer to the policyholder for the coverage set forth in the insurance policy is called the premium. If the insured experiences a loss which is potentially covered by the insurance policy, the insured submits a claim to the insurer for processing by a claims adjuster. The insurer may hedge its own risk by taking out reinsurance, whereby another insurance company agrees to carry some of the risks, especially if the primary insurer deems the risk too large for it to carry.
History – early methods Methods for transferring or distributing risk were practiced by Babylonian, Chinese and Indian traders as long ago as the third and second millennia BC, respectively. Chinese merchants traveling treacherous river rapids would redistribute their wares across many vessels to limit the loss due to any single vessel capsizing. The Babylonians developed a system which was recorded in the famous Code of Hammurabi, c. 1750 BC. It is the longest, best organized and best-preserved legal text from the ancient Near East. It is purportedly written by Hammurabi, sixth king of the First Dynasty of Babylon. The primary copy of the text is inscribed on a basalt stele 7 feet 4 1/2 inches tall. The laws were practiced 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. Circa 800 BC, the inhabitants of Rhodes created the "general average." When several merchants had cargo on the same ship — if during the voyage the cargo of one merchant was thrown overboard to save the ship during a storm, the rest of the merchants were required to reimburse the merchant, whose goods were jettisoned, from the proceeds of their saved cargo. Concepts of insurance has been also found in third century BCE Hindu scriptures such as Dharmasastra, Arthashastra and Manusmriti.
Testimony during a trial
The witness must take an oath before deposing. Single witness normally does not suffice. As many as three witnesses are required. False evidence must face sanctions.
— Gautama Dharmasutras 13.2–13.6
The ancient Greeks had marine loans. Money was advanced on a ship or cargo, to be repaid with large interest if the voyage prospered, but not repaid at all if the ship was lost, the rate of interest being made high enough to pay not only for the use of the capital but for the risk of losing it — fully described by Demosthenes. Loans of this character have ever since been common in maritime lands, under the name of bottomry and respondentia bonds. A bottomry or bottomage is an arrangement in which the master of a ship borrows money upon the bottom or keel of it, so as to forfeit the ship itself to the creditor, if the money with interest is not paid at the time appointed at the ship's safe return.
The direct insurance of sea risks for a premium paid independently of loans began — as far as is known — in Belgium about 1300 AD.
Separate insurance contracts — 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. The first known insurance contract dates from Genoa in 1347, and in the next century maritime insurance developed widely, and premiums were intuitively varied with risks. These new insurance contracts allowed insurance to be separated from investment, a separation of roles that first proved useful in marine insurance.
The earliest known policy of life insurance was made in the Royal Exchange, London, on June 18, 1583, for £383, 6s. 8d. for twelve months, on the life of William Gibbons.
History – modern methods
Insurance became far more sophisticated in Enlightenment era Europe, where specialized varieties developed.
Property insurance as we know it today can be traced to the Great Fire of London, which in 1666 devoured more than 13,000 houses. The devastating effects of the fire converted the development of insurance from a matter of convenience into one of urgency, a change of opinion reflected in Sir Christopher Wren's inclusion of a site for "the Insurance Office" in his new plan for London in 1667. A number of attempted fire insurance schemes came to nothing, but in 1681, economist Nicholas Barbon and 11 associates established the first fire insurance company, the "Insurance Office for Houses," at the back of the Royal Exchange to insure brick and frame homes. Initially, 5,000 homes were insured by his insurance office.
At the same time, the first insurance schemes for the underwriting of business ventures became available. By the end of the 17th century, London's growth as a center for trade was increasing due to the demand for marine insurance. In the late 1680s, Edward Lloyd opened a coffee house, which became the meeting place for parties in the shipping industry wishing to insure cargos and ships, including those willing to underwrite such ventures. These informal beginnings led to the establishment of the insurance market Lloyd’s of London and several related shipping and insurance businesses.
The first life insurance policies were taken out in the early 18th century. The first company to offer life insurance was the Amicable Society for a Perpetual Assurance Office, founded in London in 1706 by William Talbot and Sir Thomas Allen. Upon the same principle, Edward Row Mores established the Society for Equitable Assurances on Lives and Survivorship in 1762.
It was the world's first mutual insurer, and it pioneered age-based premiums based on mortality rate laying "the framework for scientific insurance practice and development" and "the basis of modern life assurance upon which all life assurance schemes were subsequently based."
In the late 19th century "accident insurance" began to become available. The first company to offer accident insurance was the Railway Passengers Assurance Company, formed in 1848 in England to insure against the rising number of fatalities on the nascent railway system.
By the late 19th century governments began to initiate national insurance programs against sickness and old age. Germany built on a tradition of welfare programs in Prussia and Saxony that began as early as in the 1840s. In the 1880s Chancellor Otto von Bismarck introduced old age pensions, accident insurance and medical care that formed the basis for Germany's welfare state. In Britain more extensive legislation was introduced by the Liberal government in the 1911 National Insurance Act. It gave the British working classes the first contributory system of insurance against illness and unemployment. This system was greatly expanded after World War II under the influence of the Beveridge Report, to form the first modern welfare state.
Auto insurance Auto insurance protects the policyholder against financial loss in the event of an incident involving a vehicle they own, such as in a traffic collision. Coverage typically includes:
- Property coverage, for damage to or theft of the car.
- Liability coverage, for the legal responsibility to others for bodily injury or property damage.
- Medical coverage, for the cost of treating injuries, rehabilitation and sometimes lost wages and funeral expenses.
Guaranteed Asset Protection or GAP insurance Gap insurance covers the excess amount on your auto loan in an instance where your insurance company does not cover the entire loan. Depending on the company's specific policies it might or might not cover the deductible as well. This coverage is marketed for those who have low down payments and high interest rates on their loans, along with those with 60-month or longer terms. Gap insurance is typically offered by a finance company when vehicle owners purchase their vehicles, but many auto insurance companies offer this coverage to consumers as well.
Health insurance Health insurance policies cover the cost of medical treatments. Dental insurance, like medical insurance, protects policyholders for dental costs. In most developed countries, all citizens receive some health coverage from their governments, paid through taxation. In most countries, health insurance is often part of an employer's benefits.
Income protection insurance
- Disability insurance policies provide financial support in the event of the policyholder becoming unable to work because of disabling illness or injury. It provides monthly support to help pay such obligations as mortgage loans and credit cards. Short-term and long-term disability policies are available to individuals, but considering the expense, long-term policies are generally obtained only by those with at least six-figure incomes, such as doctors, lawyers, etc. Short-term disability insurance covers a person for a period typically up to six months, paying a stipend each month to cover medical bills and other necessities.
- Long-term disability insurance covers an individual's expenses for the long term, up until such time as they are considered permanently disabled and thereafter. Insurance companies will often try to encourage the person back into employment in preference to and before declaring them unable to work at all and therefore totally disabled.
- Disability overhead insurance allows business owners to cover the overhead expenses of their businesses while they are unable to work.
- Total permanent disability insurance provides benefits when people are permanently disabled and can no longer work in their professions, often taken as an adjunct to life insurance.
- Workers’ compensation insurance replaces all or part of a worker's wages lost and accompanying medical expenses incurred because of a job-related injury.
Casualty insurance Casualty insurance insures against accidents, not necessarily tied to any specific property. It is a broad spectrum of insurance that a number of other types of insurance could be classified, such as auto, workers compensation, and some liability insurances.
- Crime insurance is a form of casualty insurance that covers the policyholder against losses arising from the criminal acts of third parties. For example, a company can obtain crime insurance to cover losses arising from theft or embezzlement.
- Terrorism insurance provides protection against any loss or damage caused by terrorist activities. In the United States in the wake of 9/11, the Terrorism Risk Insurance Act 2002 or TRIA set up a federal program providing a transparent system of shared public and private compensation for insured losses resulting from acts of terrorism. The program was extended until the end of 2014 by the Terrorism Risk Insurance Program Reauthorization Act 2007 or TRIPRA.
- Kidnap and ransom insurance is designed to protect individuals and corporations operating in high-risk areas around the world against the perils of kidnap, extortion, wrongful detention and hijacking.
- Political risk insurance is a form of casualty insurance that can be taken out by businesses with operations in countries in which there is a risk that revolution or other political conditions could result in a loss.
- Fidelity bond is a form of casualty insurance that covers policyholders for losses incurred as a result of fraudulent acts by specified individuals. It usually insures a business for losses caused by the dishonest acts of its employees.
Life insurance
Life insurance provides a monetary benefit to a decedent's family or other designated beneficiary and may specifically provide for income to an insured person's family, burial, funeral and other final expenses. Life insurance policies often allow the option of having the proceeds paid to the beneficiary either in a lump sum cash payment or an annuity. In most states, a person cannot purchase a policy on another person without their knowledge.
Annuities provide a stream of payments and are generally classified as insurance because they are issued by insurance companies, are regulated as insurance and require the same kinds of actuarial and investment management expertise that life insurance requires. Annuities and pensions that pay a benefit for life are sometimes regarded as insurance against the possibility that a retiree will outlive his or her financial resources. In that sense, they are the complement of life insurance and — from an underwriting perspective — are the mirror image of life insurance.
Certain life insurance contracts accumulate cash values, which may be taken by the insured if the policy is surrendered or which may be borrowed against. Some policies, such as annuities and endowment policies, are financial instruments to accumulate or liquidate wealth when it is needed.
In many countries, such as the United States 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 the United States, 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.
Burial insurance
Burial insurance is a very old type of life insurance which is paid out upon death to cover final expenses, such as the cost of a funeral. The Greeks and Romans introduced burial insurance c. 600 CE when they organized guilds called "benevolent societies" which cared for the surviving families and paid funeral expenses of members upon death. Guilds in the Middle Ages served a similar purpose, as did friendly societies during Victorian times.
Property insurance Property insurance provides protection against risks to property, such as fire, theft or weather damage. This may include specialized forms of insurance such as fire insurance, flood insurance, earthquake insurance, home insurance, inland marine insurance or boiler insurance. The term “property insurance” may, like casualty insurance, be used as a broad category of various subtypes of insurance, some of which are listed below:
- Aviation insurance protects aircraft hulls and spares, and associated liability risks, such as passenger and third-party liability. Airports may also appear under this subcategory, including air traffic control and refueling operations for international airports through to smaller domestic exposures.
- Boiler insurance — also known as boiler and machinery insurance or equipment breakdown insurance — insures against accidental physical damage to boilers, 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 arising from any cause — including the negligence of the insured — not otherwise expressly excluded. Builder's risk insurance is coverage that protects a person's or organization's insurable interest in materials, fixtures or equipment being used in the construction or renovation of a building or structure should those items sustain physical loss or damage from an insured peril.
- Crop insurance may be purchased by farmers 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. Index- based insurance uses models of how climate extremes affect crop production to define certain climate triggers that — if surpassed — have high probabilities of causing substantial crop loss. When harvest losses occur associated with exceeding the climate trigger threshold, the index-insured farmer is entitled to a compensation payment.
- 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 home insurance policies do not cover earthquake damage. Earthquake insurance policies generally feature a high deductible. Rates depend on location and hence the likelihood of an earthquake, as well as the construction of the home.
- Flood insurance protects against property loss due to flooding. Many U.S. insurers do not provide flood insurance in some parts 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 — also commonly called hazard insurance or homeowners insurance, often abbreviated in the real estate industry as HOI — provides coverage for damage or destruction of the policyholder's home. In some geographical areas, the policy may exclude certain types of risks, such as flood or earthquake, that require additional coverage. Maintenance-related issues are typically the homeowner's 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.
- Landlord insurance covers residential or commercial property that is rented to tenants. It also covers the landlord's liability for the occupants at the property. Most homeowners' insurance, meanwhile, cover only owner-occupied homes and not liability or damages related to tenants.
- Marine insurance and marine cargo insurance cover the loss or damage of vessels at sea or on inland waterways and of cargo in transit, regardless of the method of transit. 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.
- Renters’ insurance, often called tenants' insurance, is an insurance policy that provides some of the benefits of homeowners' insurance, but does not include coverage for the dwelling or structure, with the exception of small alterations that a tenant makes to the structure.
- Supplemental natural disaster insurance covers specified expenses after a natural disaster renders the policyholder's home uninhabitable. Periodic payments are made directly to the insured until the home is rebuilt or a specified time period has elapsed.
- Surety bond insurance is a three-party insurance guaranteeing the performance of the principal.
- Volcano insurance is a specialized insurance protecting against damage arising specifically from volcanic eruptions.
- Windstorm insurance is an insurance covering the damage that can be caused by wind events such as hurricanes.
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 or 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.
- Public liability insurance or general liability insurance covers a business or organization against claims should its operations injure a member of the public or damage their property in some way.
- Directors and officers liability insurance or D&O protects an organization — usually a corporation — from costs associated with litigation resulting from errors made by directors and officers for which they are liable.
- Environmental liability or environmental impairment 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 or E&O is business liability insurance for professionals such as insurance agents, real estate agents and brokers, architects, third-party administrators and other business professionals.
- 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 corporations and medical practitioners 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 medical malpractice insurance.
Often a commercial insured's liability insurance program consists of several layers. The first layer of insurance generally consists of primary insurance, which provides first-dollar indemnity for judgments and settlements up to the limits of liability of the primary policy. Generally, primary insurance is subject to a deductible and obligates the insured to defend the insured against lawsuits, which is normally accomplished by assigning counsel to defend the insured. In many instances, a commercial insured may elect to self-insure. Above the primary insurance or self-insured retention, the insured may have one or more layers of excess insurance to provide coverage additional limits of indemnity protection. There are a variety of types of excess insurance, including "stand-alone" excess policies (policies that contain their own terms, conditions, and exclusions), "follow form" excess insurance (policies that follow the terms of the underlying policy except as specifically provided) and "umbrella" insurance policies (excess insurance that in some circumstances could provide coverage that is broader than the underlying insurance).
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