Insurance

ROLCAM · Posted: Wed Jun 06, 2007 12:58 pm Post subject: Insurance

Insurance is a means of providing protection against financial loss in a great variety of situations. For example, life insurance helps replace income lost to a family if a wage-earning parent dies. Health insurance helps pay medical bills. Fire insurance pays all or part of the loss if a homeowner's house is destroyed by fire. Automobile insurance helps cover the costs of damages resulting from a car accident. People also can buy insurance to cover unusual types of financial losses. For example, dancers have insured their legs against injury.

Insurance works on the principle of sharing losses. People who wish to be insured against particular types of losses agree to make regular payments, called premiums, to an insurance company. In return, these people receive a contract, called a policy, from the company. The company promises to pay them a certain sum of money for the types of losses stated in the policy. The individuals paying premiums are called policyholders. The amount of money paid by the insurance company to the policyholders is known as the benefit or the claim. The insurance company uses the premiums to invest in stocks, bonds, mortgages, government securities, and other income-producing enterprises. The company pays benefits from the premiums it collects and from the investment income the premiums earn. Insurance works because policyholders are willing to trade a small, certain loss--the premiums--for the guarantee that they will be indemnified (paid) in case of a larger loss.

Although a policyholder may never receive benefits from an insurance company, the premiums have not been wasted. Insurance gives policyholders a feeling of security. Policyholders know they will be indemnified if a loss should occur. They can therefore own property, drive a car, operate a business, and engage in many other activities without worrying about the financial losses that might result.

Insurance works well only when the possible losses to the insured person can be estimated. Insurance companies take advantage of the laws of probability. These laws enable an insurance mathematician called an actuary to determine the likelihood that an event will occur. Laws of probability are based on the law of large numbers. As the number of auto insurance policyholders increases, for example, an insurance company can use this law to predict with ever-greater accuracy the number of policyholders who will be in an accident.

Insurance generally covers only situations involving pure risk--that is, situations in which only losses can occur. Such situations include fire, flood, and accidents. Insurance does not cover gambling and other speculative risks, in which either losses or gains may result.

This article discusses the three main types of insurance sold by insurance companies. These types are (1) life insurance; (2) private health insurance; and (3) property and liability insurance.

Life insurance

A life insurance policy provides that the insurance company will pay a certain amount of money when the person insured dies. The amount of money is called the face value or death benefit of the policy. It is paid in a lump sum or in installments to the beneficiary, the person or persons named by the policyholder to receive the death benefit. Most policyholders insure themselves or members of their family. But a person may insure the life of a nonrelative if the nonrelative permits it.

Wage earners buy life insurance chiefly to replace income that would be lost to their families if they died. Money from an insurance policy can help support a wage earner's children until they are old enough to support themselves and can provide funds for their education. It can also help provide an income for a surviving spouse. In addition, money from the death benefit can be used to pay the deceased's medical bills, funeral expenses, and other debts. It may also be used to pay estate and inheritance taxes. Businesses often buy life insurance to cover key employees and to provide financing to continue the business if a partner dies. Some life insurance policies allow policyholders who are terminally ill or confined to a nursing home to receive benefits before they die.

Some types of life insurance policies also enable policyholders to save money. Such policies have a cash value. A policyholder may borrow money against the cash value or surrender (turn in) the policy for its cash value. Any amount borrowed against the cash value, plus interest, is subtracted from the face value if the insured person dies before the loan is repaid. Some policies have a double indemnity clause. It provides a payment of two to three times the face value of the policy if the insured person dies as the result of an accident.

About 155 million Americans carry life insurance having a total face value of more than $6 trillion. In Canada, about 25 million people have life insurance. The total value of the policies is about $750 billion.

Main kinds of life insurance. There are three main kinds of life insurance: (1) term life insurance; (2) whole life insurance; and (3) endowment life insurance. Most life insurance companies also sell policies that combine these basic types of insurance. In addition, they sell retirement income plans called annuities.

Term life insurance provides benefits only if the insured person dies within the period covered by the policy. This period may range from 1 to 40 or more years. Term insurance accounts for about half the total face value of all individual life insurance policies sold each year in the United States. In Canada, term insurance accounts for about 30 per cent of the total face value of life insurance policies sold annually.

Term life insurance costs less than other types of life insurance for the same amount of coverage because it has no cash value. Many insurance experts recommend term insurance for people on a limited budget or who require coverage for only a short time. Many people with young children buy term insurance to cover the period until the children are grown.

A type of term life insurance called straight term insurance ends automatically after a stated number of years. On the other hand, renewable term life insurance enables a policyholder to continue the policy automatically for another term when the policy expires. Such policies permit the policyholder to renew several times. But the majority of insurance companies do not permit renewal after the insured person reaches the age of 65 or 70. The premiums rise each time the policy is renewed because the probability of death increases with age. The premiums rise dramatically for older people.

People who feel that in the future they may prefer a policy with a cash value to term insurance can buy convertible term insurance. A person with such insurance can convert the term policy to a whole life policy when the term policy expires. Another variation of term insurance is decreasing term insurance. The face value of the policy decreases during the period of the policy. A common type of decreasing term insurance used for paying off loans if the borrower dies is called credit life insurance. The amount of coverage that is provided by a credit life policy decreases as the loan is repaid. The insurance provides funds to cover the unpaid balance of a loan or mortgage if the borrower dies.

Many businesses provide life insurance to their employees through a group life insurance plan. Most such plans offer term insurance. In nearly all cases, the premiums for group life policies cost less than the premiums for individual policies, partly because group plans have lower administrative costs. In addition, employers often pay at least part of the premiums. Some labor unions, professional associations, and other organizations also provide group life insurance to their members.

Whole life insurance provides coverage for the lifetime of the person insured. About 80 per cent of all individual life insurance policies sold annually in the United States and Canada include some whole life insurance.

The most common whole life policy is a straight life policy, or a continuous premium policy. The premiums are payable as long as the insured person lives. A limited payment policy also gives lifetime protection. However, it provides for completing the payments within a limited period, usually 20 or 30 years, or at a certain age, such as 65. The premiums are higher than for straight life because they are paid for fewer years.

Unlike most term life insurance premiums, whole life premiums do not increase with the age of the person insured. However, whole life insurance costs more than term insurance. Policyholders of whole life insurance actually pay more than the amount needed to cover the statistical risk of death at their age. This excess amount, plus the interest paid on it by the insurance company, accumulates and forms the policy's cash value. The cash value increases with the age of the policy. When the insured person dies, however, the beneficiary receives only the face value, regardless of the cash value.

Many whole life policyholders borrow against the cash value or surrender their policies for the cash value to supplement their retirement income or to meet major expenses. A policyholder who surrenders a whole life policy can take advantage of nonforfeiture options in the policy to buy another policy. The policyholder can use all or part of the cash value to purchase extended term insurance or paid-up insurance. Extended term provides coverage equal to the face value of the original policy but for a limited period. Paid-up insurance provides lifetime coverage but at a lower amount.

Endowment life insurance, like other life insurance policies, pays the face value on the death of the insured person. But endowment insurance is chiefly a means of saving money. Policyholders often use endowment policies to finance the education of their children. It is the most expensive type of life insurance. Most endowment policies mature (are paid up) within 20 years or when the insured person reaches the age of 65. A policyholder who lives until the policy matures collects the face value of the policy. If the policyholder dies before that time, the beneficiary receives the face value.

Other kinds of life insurance. In the 1970's, the life insurance industry developed some new kinds of life insurance. These new kinds of insurance include universal life insurance and variable life insurance.

Universal life insurance offers better investment returns than traditional policies. Interest rates on the policy's cash value are competitive with money market funds and accounts. This type of insurance also allows policyholders to adjust their coverage to meet changing economic or personal conditions. For example, policyholders can change the proportion of term life insurance and whole life insurance in a policy. They can also increase or decrease the face value of the policy, raise or lower the amount of the premiums, and shorten or lengthen the premium-paying period.

Variable life insurance policies are supported by investments, usually in the stock market. The face value and cash value of variable life insurance policies vary according to the performance of the investments. Usually a minimum face value or death benefit is guaranteed regardless of how the stocks perform. Some companies offer universal variable life insurance, which combines the features of universal and variable life insurance.

Dividends. Some insurance policies refund part of the premiums to policyholders in the form of dividends. Such policies are called participating policies. An insurance company pays dividends if the money it collected in premiums exceeded the amount needed to pay benefits and administrative costs. Dividends also may include a share of the profits the company earned on investments made with premium funds. Dividends may be paid on many types of insurance. But they are most commonly paid on life insurance. Policies that do not pay dividends are known as nonparticipating policies.

An owner of a participating policy may receive the dividends in cash or allow them to accumulate with the insurance company, which pays interest on the amount. A policyholder may also use the dividends to help pay the premiums on the policy or to purchase additional insurance.

How premiums are figured. Life insurance premiums are based chiefly on statistical tables called mortality tables. These tables state the number of people of a given age who are expected to die during a year. Insurance companies also base premiums on the interest they expect to earn from investments made with the premiums and on the cost of doing business.

The amount of the premiums may also be affected by a person's insurability--that is, the risk the insurance company takes in providing coverage for that person. A person who has high blood pressure, diabetes, or some other medical condition may be charged higher premiums. An individual whose work or leisure activities are considered dangerous may also pay higher premiums. The majority of insurance companies charge lower premiums to nonsmokers, and some companies charge lower rates to nondrinkers and people who exercise regularly.

Buying life insurance. Many insurance experts believe wage earners should buy life insurance only if they have dependents. They recommend that a family with two or more children have life insurance equal to about four or five times the family's annual income.

Authorities disagree on which type of life insurance a person should buy. Some experts recommend whole life insurance because the premiums remain fixed for the lifetime of the insured. They point out that whole life insurance results in forced savings and so may be attractive to people who find it difficult to save. The cash value of the policy can be borrowed against, or the policy can be surrendered for its cash value.

Other experts prefer term life insurance because it provides the same amount of protection as whole life insurance but does so at a lower cost. They also criticize the low interest rates paid by many companies on the cash value of traditional whole life policies. These experts point out that a policyholder can earn more interest in other ways.

Insurance experts recommend that a person who wishes to purchase life insurance consult a guide called the interest-adjusted cost index. This guide enables a potential buyer to compare the costs of some similar policies offered by different companies. Many states require insurance companies to furnish this index to potential buyers.

Annuities are savings plans sold chiefly by insurance companies to provide retirement income. They provide fixed, regular payments to the annuitant (owner of the annuity). A type of annuity called a life annuity ceases on the death of the annuitant. A life annuity with installments certain provides payments during the lifetime of the annuitant or for a fixed number of years, whichever is longer. If the annuitant dies before receiving the guaranteed number of payments, the insurance company must continue the payments to the beneficiary.

Some types of annuities guarantee the refund of all money contributed by the annuitant. If the annuitant dies before receiving the full amount contributed, the beneficiary receives the balance.

A joint and survivorship annuity provides income to two people. Payments are made initially to both people. When one dies, the survivor usually receives smaller payments until his or her death. Variable annuities were developed to protect annuitants against inflation. Variable annuity funds are invested principally in stocks, and the payments vary depending on the performance of the stocks. Ideally, as inflation increases, stock prices will also increase and provide higher payments to annuitants.

Employees of nonprofit organizations and public school systems can buy tax-deferred annuities. People who purchase this type of annuity can postpone paying taxes on the income they contribute to the annuity until a later date, usually retirement.

Private health insurance

Health insurance pays all or part of the cost of hospitalization, surgery, laboratory tests, medicines, and other medical care. The rising cost of medical care has increased the need for adequate health insurance. People without such coverage could suffer a major financial hardship in case of a serious illness or accident.

The majority of people in the United States have some form of private or public health insurance, though many have limited coverage. About 200 million Americans--about 80 per cent of all Americans--carry private health insurance. In Canada, nearly all people are covered by provincial government health insurance. Private insurance companies also offer additional coverage to those who wish to purchase it. For information on public health insurance, see the section Social insurance in this article.

Private health insurers sell individual and group policies. However, most people with private health insurance are covered under a group plan where they work. Group plans may also cover the insured person's dependents. Group health insurance generally costs less than individual coverage because administrative costs and other expenses are lower. Many employers pay all or part of the premiums for their employees.

How private health insurance is provided. Private health insurance in the United States is offered mainly by (1) insurance companies; (2) medical service plans; (3) health maintenance organizations (HMO's), and (4) employers.

Insurance companies. Many companies that sell health insurance policies provide cash benefits to the insured person. A cash benefit is a fixed dollar amount for each medical expense or day of hospitalization. If the cash benefits do not cover the entire cost of medical care, the policyholder must pay the balance.

Medical service plans pay service benefits. A service benefit is a direct payment to the hospital or physician that provided the medical care. Payments are limited to reasonable and customary charges. Such a charge is the average cost of a particular medical service in the area in which the insured person lives. In most cases, health insurance policies with service benefits offer fuller coverage but cost more than policies with cash benefits. Unlike insurance companies, medical service plans operate on a nonprofit basis. Blue Cross and Blue Shield are the largest medical service plans in the United States (see BLUE CROSS AND BLUE SHIELD).

Health maintenance organizations (HMO's) provide nearly complete health care services for a prepaid monthly or yearly fee. Such services range from hospitalization and surgery to medication and visits to a physician's office. HMO's are sponsored by various foundations, communities, medical groups, insurance companies, and medical service plans. The number of Americans who belong to HMO's has increased from 3 1/2 million in 1971 to more than 50 million today.

Employers may pay for the health care costs of their employees rather than buy insurance. In this way, companies can design benefit plans to suit their circumstances, and they may profit by investing the money that would be spent on insurance. Many larger companies have made such arrangements.

Basic types of health insurance. Private health insurers offer four main types of health insurance. They are (1) hospital expense insurance; (2) surgical expense insurance; (3) outpatient expense insurance; and (4) major medical expense insurance. Most experts recommend that a person select a policy that incorporates all four types of insurance.

Hospital expense insurance is the most common type of medical insurance. It provides a fixed daily payment for a stated number of days each year to cover the cost of hospital room and board. It also covers laboratory tests, X rays, medication, nursing services, and the use of an operating room. Hospital expense insurance may pay cash or service benefits.

Surgical expense insurance covers a surgeon's operating fees. Many policies pay the total cost of such fees to a reasonable and customary limit. But if the surgeon charges a higher fee, the insured person must pay the additional cost.

Outpatient expense insurance covers fees charged by physicians for nonsurgical care in their office, in a hospital, or in the patient's home. It also covers the cost of X rays and laboratory and diagnostic tests for a policyholder who is not hospitalized. Most health insurance policies sold by insurance companies and medical service plans provide limited outpatient insurance. HMO's, on the other hand, offer full outpatient benefits. Outpatient insurance is also called regular medical insurance or physician's expense insurance.

Major medical expense insurance pays the enormous costs resulting from a serious illness or accident. Maximum benefits typically range from $50,000 to $250,000, though some policies have no limit. However, many policies pay only 80 per cent of the expenses covered by the policy. The policyholder has to pay the balance. In addition, almost all major medical policies have a deductible--that is, an initial sum of money for which the policyholder is liable. The insurer pays any excess up to the amount specified by the policy. Deductibles commonly range from $100 to $1,000.

Other types of health insurance include disability income insurance and dental expense insurance. Disability income insurance provides funds that partly replace income lost when the insured person cannot work because of an accident or illness. Most workers in the United States and Canada have some form of disability income insurance. Such coverage is sold by insurance companies through employers.

Dental expense insurance is one of the fastest-growing types of health insurance. It helps pay for a wide variety of dental services. Such preventive services as cleaning and X rays are often fully covered. Most policies provide limited coverage for other services by applying a maximum dollar amount or percentage to the cost of the services. About 110 million Americans and about 10 million Canadians have dental insurance.

Property and liability insurance

Many individuals and businesses buy property and liability insurance to protect their assets against financial loss. Property insurance provides direct compensation if a policyholder's possessions are damaged, destroyed, or lost as a result of perils specified in the policy. A peril may be natural or the consequence of human actions. Commonly insured natural perils include fires, tornadoes, and hail. Perils caused by the actions of people include automobile accidents, burglary, and arson. Policies may be written on an all-risks basis. But such perils as war and nuclear contamination are not covered.

Property insurance policies limit the amount of compensation for losses. Nearly all policies have a deductible for which the policyholder is liable. The sum the policyholder can recover also is limited by the face value of the policy. Many policies restrict compensation to the actual cash value of the property--that is, the replacement cost of the property minus depreciation.

Liability insurance protects individuals and businesses against possible financial losses if their actions result in bodily injury to others or in harm to property owned by others. A victim of such actions could sue the person or business responsible. If the court judges the defendant to have been negligent, it may order the defendant to pay damages to the victim. Liability insurance pays for these damages and a policyholder's defense costs. Many liability cases are settled out of court. In such cases, the policyholder's insurance company and the person claiming injury agree on the amount of the damages. Liability insurance thus indirectly protects a policyholder's assets, which would otherwise be used to pay the damages. Most insurance experts recommend that policyholders carry high liability limits.

Insurance companies sell several types of property and liability insurance. The main types of individual coverage are (1) homeowners' insurance and (2) automobile insurance. Most people can obtain sufficient property and liability coverage by buying both types.

Homeowners' insurance provides protection against losses from damage to an owner's home and its contents. People who rent may buy a type of homeowners' insurance called tenant's insurance or renter's insurance, which covers only the policyholder's personal property. Homeowners' and tenant's policies are package policies, which means they provide both property and liability coverage for a variety of perils. Package policies also are called multiple-peril insurance.

Homeowners' property insurance protects against losses from such perils as fire, tornadoes, vandalism, theft, explosion, riot or civil disturbance, and damage by automobiles, aircraft, and other vehicles. Homeowners' policies do not cover damage caused by earthquakes and floods, though such coverage may be purchased separately. Perils for which property insurance cannot be obtained include war and nuclear radiation.

Homeowners' policies limit the amount of coverage on such items as cash, securities, coin collections, jewelry, silverware, guns, and furs. Most property owners who wish to insure such valuables fully buy additional coverage on their homeowners' policies.

An insurance company may require a policyholder to provide proof of the ownership and the value of lost or damaged property before it pays compensation. For this reason, policyholders should have such evidence of their possessions as lists, sales receipts, appraisals, or photographs. The evidence should be kept in a safe-deposit box or other secure place outside the home.

Homeowners' liability insurance protects a policyholder if a visitor is accidentally injured while on or while using the policyholder's property. The insurance company may pay damages even if the person claiming injury does not sue the policyholder. If the policyholder is sued and found not responsible, the insurance company still pays all legal expenses.

Automobile insurance is the most widely purchased property and liability insurance. It is one of the most important kinds of insurance because of the serious injuries and extensive property damage that can result from auto accidents. Drivers are legally responsible for any costs arising from accidents they cause. Automobile insurance protects a policyholder against financial losses from accidents. It also provides compensation if a policyholder's car is stolen, vandalized, or damaged in a collision or by storms or other natural perils.

Like homeowners' insurance, most auto insurance policies are package policies and so offer both property and liability coverage. Although benefits vary according to the type of policy, nearly all policies provide four kinds of coverage. They are (1) liability coverage; (2) collision and comprehensive coverage; (3) uninsured motorists coverage; and (4) medical payments coverage. In addition, about half the states in the United States and four Canadian provinces have passed laws providing for a type of accident insurance called no-fault insurance.

Liability coverage protects policyholders if an auto accident for which they are responsible causes bodily injury to others or property damage. Liability coverage is considered essential for all car owners. In fact, about half the states and all the provinces require motorists to have such insurance before they may own or drive a car.

Collision and comprehensive coverage pays for losses resulting from damage to a policyholder's auto. Collision insurance provides protection if the car hits another car or object or runs off the road. Comprehensive insurance covers losses from such perils as fire, theft, flood, and hail. Nearly all collision and comprehensive insurance has a deductible. The company thus does not compensate a policyholder for small losses.

Uninsured motorists coverage pays benefits to a policyholder injured by a driver who is judged to be responsible and who does not carry liability insurance. It also covers policyholders and their families who are injured by an uninsured driver while riding in another person's car or while walking. Injuries caused by a hit-and-run driver are also covered.

Medical payments coverage provides a small sum for the medical expenses of policyholders and their passengers injured in an auto accident. It pays benefits even if the policyholder is not at fault.

No-fault insurance enables auto accident victims to collect damages automatically from their own insurance company, regardless of who caused an accident. These damages chiefly cover medical expenses and loss of income. See NO-FAULT INSURANCE.

Other kinds of property and liability insurance include (1) special multi-peril (SMP) and business owners' policy (BOP); (2) marine insurance; (3) crime insurance; (4) surety bonds; and (5) product liability insurance and malpractice insurance. SMP and BOP policies are commercial multiple-peril policies that provide property and liability insurance for business risks. They are similar to homeowners' policies.

Marine insurance consists of two types of insurance that deal with risks involved in transportation. Ocean marine insurance covers commercial and recreational vessels operating on oceans, lakes, and rivers and in harbors. It includes both property and liability coverage and compensates for the loss of a vessel and its cargo. Inland marine insurance provides protection against losses connected with land transportation. It covers cargo as well as bridges, railroads, tunnels, and other facilities involved in transporting cargo.

Crime insurance protects policyholders against losses from such acts as theft, burglary, robbery, forgery, and embezzlement. Most homeowners' policies and commercial multiple-peril policies include theft, robbery, and burglary insurance. Businesses may buy a type of crime insurance called fidelity bonds. Such insurance protects them against losses due to dishonest acts by employees who handle money or valuable merchandise. Banks and other financial institutions purchase a broader type of crime insurance called blanket bonds. The bonds provide protection against dishonesty by nonemployees and employees as well as against fires, tornadoes, and other natural causes.

Surety bonds guarantee that the insured will fulfill a certain obligation. One of the most important types of surety bonds is a contract performance bond. Under such a bond, the insurance company, or surety, promises to see that a project is completed if the insured fails to do so according to the terms of the contract. Other types of surety bonds include bail bonds and fiduciary bonds. A bail bond guarantees the appearance in court of a person accused of a crime. If the accused person appears in court, the money for the bond is refunded. Otherwise, the money is forfeited. Fiduciary bonds guarantee the performance of people who are appointed by a court to be responsible for another's property.

Product liability insurance protects manufacturers against losses from lawsuits in which consumers claim injuries as a result of using defective products. Malpractice insurance, or professional liability insurance, protects such professionals as physicians, accountants, and lawyers against losses from lawsuits in which a patient or client accuses them of error or negligence.

Government insurance programs

Social insurance is insurance administered or supervised by the government. It provides benefits to the elderly and to unemployed, disabled, and sick workers and their families, and to families of deceased workers. Social insurance programs are financed by taxes paid by workers and employers. Participation in such programs is required for most workers. Benefits are paid to all people entitled to receive them, regardless of their need. Social insurance programs differ from public assistance programs, which are financed by general taxes and pay benefits according to an individual's need.

The major forms of social insurance in the United States are (1) old-age, survivors, and disability insurance; (2) Medicare; (3) workers' compensation; and (4) unemployment insurance. Most other industrialized nations and many developing countries also have social insurance. For information on social insurance in Canada, see SOCIAL SECURITY (Social security in Canada).

Old-age, survivors, and disability insurance pays benefits to retired workers and their dependents, to disabled workers and their dependents, and to the survivors of workers who die. Nearly all American workers are covered by the insurance. Benefits are based on a worker's average earnings and are financed by a payroll tax shared by workers and employers. See SOCIAL SECURITY (OASDHI).

Medicare is a health insurance program. It covers nearly all Americans 65 years of age or older and certain disabled people. Medicare consists of hospital insurance and supplementary medical insurance. Hospital insurance is financed by a payroll tax paid by workers and their employers. The insurance helps cover the cost of hospital, nursing home, and at-home care. Medical insurance is financed by premiums paid by people eligible to receive benefits and by general tax revenues. It helps pay doctor bills and other medical costs not covered by hospital insurance. See MEDICARE.

Many elderly people supplement their Medicare coverage with private insurance called Medigap insurance. Medigap insurance pays hospital bills and other medical expenses that Medicare does not cover.

Workers' compensation pays the cost of medical care for employees who are injured in a job-related accident or who contract a disease as a result of their job. Workers also receive compensation for lost income. In addition, the insurance provides payments to dependents of workers if death occurs. Employers pay the cost of the insurance. See WORKERS' COMPENSATION.

Unemployment insurance provides cash payments for a limited number of weeks to workers who lose their job. It is financed by a payroll tax paid by employers. See UNEMPLOYMENT INSURANCE.

Other government insurance programs. Certain agencies of the U.S. government provide special types of insurance. For example, the Federal Deposit Insurance Corporation insures bank deposits. If an insured bank cannot pay its depositors, the corporation pays them, up to a maximum of $100,000 for each bank account. Farmers can obtain coverage against crop losses from flood, drought, and other natural perils through the government's Farm Service Agency. The Federal Insurance Administration provides protection against losses from flood damage in areas where floods often occur. The government also provides life insurance to members of the armed forces.

The insurance industry

Insurance companies play a vital role in the economy of many nations. They contribute to a country's economic stability by compensating individuals and businesses for financial losses that might otherwise ruin them. Insurance companies invest billions of dollars in stocks, bonds, mortgages, government securities, and other income-producing enterprises. Insurance companies also help guarantee repayment of loans and the completion of commercial projects and public works. People can reduce the risks of starting a new business or acquiring property by buying insurance. Thus, the insurance industry helps increase the production of goods and services.

The United States has the world's largest private insurance industry. American insurance companies write nearly half the total value of policies sold worldwide each year. The nation has about 1,800 life and health insurance companies and about 3,500 property and liability companies. Altogether, they have assets of more than $13/4 trillion. Each year, American insurance companies collect more than $500 billion in premiums. They pay more than $400 billion annually in benefits and claims.

Canada has about 200 life and health insurance companies and about 250 property and liability companies. The combined assets of these firms amount to approximately $200 billion. Each year, Canadian insurance companies collect about $25 billion (in Canadian dollars) in premiums and pay out more than $15 billion in benefits and claims.

Nearly all other highly industrialized nations also have a well-developed private insurance industry. Most developing countries have few private insurance firms.

Types of insurance companies. Most insurance companies in the United States and Canada are stock insurance companies or mutual insurance companies. A stock insurance company is owned by stockholders, who share in profits earned by the company. A mutual insurance company is owned by the policyholders. Profits earned by a mutual company are returned to the policyholders as dividends or used to cut future premiums.

Other types of insurance organizations include cooperative insurance companies and unincorporated proprietary insurers. Cooperative insurance companies, also called mutual benefit associations, are fraternal, industrial, or union groups owned by and operated for the members of the group. Unincorporated proprietary insurers are associations of individuals who join to insure a particular risk. Lloyd's of London is the most important organization of this type (see LLOYD'S).

How insurance is sold. Most insurance companies in the United States and Canada sell policies through agents. Exclusive agents are employees of an insurance company who sell only that company's policies. Independent agents are independent business owners who sell policies for several companies. Large businesses or other commercial organizations with extensive insurance needs frequently buy insurance through a type of independent agent called a broker. Brokers represent policyholders rather than insurance firms.

Government regulation. The insurance industry is heavily regulated in the United States and Canada. In the United States, the state governments have nearly complete control of insurance regulation. In Canada, both the federal government and the provincial governments regulate the industry.

Insurance companies are regulated mainly because policyholders pay in advance for benefits. Government regulations help ensure that the companies remain financially sound and so can meet their obligations. Government agencies periodically examine each company's methods, review its investments, and see that it has adequate funds in reserve to pay future claims. The government enforces laws concerning trade and marketing practices of insurance companies. Such laws are designed to prevent the sale of policies with unfair or misleading terms and to help guarantee that people who need insurance can obtain it.

In the United States, each state has a department that regulates and licenses insurance companies operating within the state. In Canada, the federal government deals chiefly with matters involving the financial stability of insurance companies. Provincial governments supervise the business and marketing practices.

Careers in the industry. The most familiar insurance employees are insurance agents. They most often represent insurance companies in dealings with insurance buyers and policyholders.

The insurance industry also offers other types of careers. Specialty careers include those of actuaries, underwriters, and claims adjusters. Actuaries are mathematicians who use complex statistical tables to calculate premium rates for different risk situations and set reserves. Underwriters decide whether a company will accept a risk and, if so, at what price. Claims adjusters determine the extent of a company's liability and the amount it should pay when policyholders suffer a loss.

Insurance companies also employ accountants, computer specialists, finance experts, lawyers, librarians, engineers, and advertising and public relations specialists. Nearly all these workers, as well as actuaries, underwriters, and claims adjusters, have a college degree. Many have a graduate or specialized degree. An experienced agent or underwriter may become a Chartered Life Underwriter (C.L.U.) or a Chartered Property and Casualty Underwriter (C.P.C.U.). To become a C.L.U. or a C.P.C.U., a person must pass tests in the field of life insurance or property and casualty insurance. Other insurance workers include secretaries, receptionists, and clerks.

History

Earliest insurance. Insurance is thousands of years old. The Code of Hammurabi, a collection of Babylonian laws of the 1700's B.C., included a form of credit insurance. A borrower did not have to repay a loan if personal misfortune made it impossible to do so. The borrower paid an extra amount for this protection in addition to the interest. Ancient Greek and Roman organizations provided money for the burial of their members, old-age pensions, and disability insurance. During the Middle Ages, guilds (associations) formed by craftworkers offered the same types of insurance as well as fire and theft insurance to their members.

The growth of insurance. Modern marine insurance and the practice of underwriting began about 1690 in a London coffee house owned by Edward Lloyd. Lloyd's was a popular meeting place for shipowners and merchants. A statement of a ship's cargo was recorded on a piece of paper and read by the coffee house patrons. Those willing to share the risk of insuring the cargo signed under the statement and indicated the share of the risk they would underwrite (guarantee).

Earlier in the 1600's, two French mathematicians, Blaise Pascal and Pierre de Fermat, developed the theory of probability, which is now widely used in determining insurance rates. The English astronomer Edmond Halley developed the first mortality table in 1693.

The Great Fire of London in 1666 led a doctor named Nicholas Barbon to open England's first fire insurance office. In 1752, Benjamin Franklin helped found the American Colonies' first mutual fire insurance company, the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire. The colonies' first life insurance company was the Presbyterian Ministers' Fund, established in 1759. Both companies still exist.

The U.S. life insurance industry grew slowly in the first half of the 1800's. Many religious leaders condemned life insurance. They believed that insurance companies were wrong in placing a money value on human life. In 1840, the total value of life insurance policies in force was less than $5 million. By 1865, the total value was about $600 million.

Other types of insurance also grew rapidly beginning in the mid-1800's. A series of disastrous fires during the mid-1800's and late 1800's led to a rapid increase in the number of fire insurance policies. In 1864, the Travelers Insurance Company sold the first accident policy. It covered a Hartford, Connecticut, resident named James Bolter during a two-block walk from his home to the post office. The premium was 2 cents for the walk.

Also during the mid-1800's, many states began to establish insurance departments and to pass laws regulating the insurance industry as a result of dishonesty by some companies. However, insurance laws frequently were not strictly enforced. During the late 1800's, the industry was plagued by scandals caused by the dishonest and irresponsible practices of many companies. In the early 1900's, many states passed laws that regulated the activities of insurance companies more strictly.

In 1935, Congress passed the Social Security Act to provide old-age benefits and unemployment compensation. In the early 1940's, during World War II, the federal government prohibited wage increases in most industries. Many employers then began to offer their employees various benefits including group life and health insurance. In 1944, the Supreme Court of the United States ruled that insurance was interstate commerce and so was subject to federal regulation. However, the McCarran-Ferguson Act, passed by Congress in 1945, left regulatory power to the states.

Insurance today. Since 1970, about half the states have adopted some type of no-fault automobile insurance plans. Many states also have passed laws requiring insurance companies to provide potential buyers with complete information about the costs and benefits of their policies. In addition, companies in some states no longer may use such factors as sex, age, marital status, or place of residence to determine premium rates for certain types of insurance.

A number of problems involving insurance exist today. Special policies are needed to cover such risks as accidents in nuclear power plants, environmentally damaging oil spills, and the disposal of hazardous wastes. In the United States, the Social Security system may face severe difficulties in providing future social insurance benefits. The rapidly rising cost of medical care has resulted in sharp increases in the health insurance premiums paid by many people. Such cost increases have led some groups to urge the adoption of government-financed health insurance programs.

In 1996, the U.S. government enacted a law to guarantee workers the ability to get health insurance after they change or lose their jobs. Before the law was enacted, many insurance companies had refused to cover people who already had a health problem. As a result, many people could not get private health insurance, or could not move to a new job without losing their coverage. The law, which took effect in 1997, also aimed at making health insurance more affordable. For example, it called for raising the percentage of health insurance costs that self-employed people could deduct from their income when figuring their federal income tax. The law provided for raising this percentage from 30 to 80 percent by the year 2006.

The high cost of health insurance is due in part to the large number of malpractice suits filed against physicians. In many of these suits, the amount of money awarded has exceeded $1 million. The number of lawsuits and the amounts awarded have also increased in such areas as product liability, liability of directors and officers of corporations, and workers' compensation. In addition, the rate of return on insurance companies' investments declined during the early 1980's. Some companies had net losses. The industry reacted by raising premiums and refusing to insure high-risk clients. These measures caused hardship for many businesses; for such professionals as doctors, lawyers, and accountants; and for such public institutions as schools and parks.
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Roland Camilleri

Moderator

Sydney , Australia.