Insurance

Insurance

Insurance is a means of protection from financial loss. It is a method of risk management that is primarily employed to protect against the risk of a potential loss.


An organization that offers insurance is referred to as an underwriter, insurer, insurance business, or insurance carrier. An insured or a policyholder is a person or thing that purchases insurance. In exchange for the insurer's pledge to pay the insured in the case of a covered loss, the insured agrees to assume a guaranteed and known, relatively small loss in the form of payment to the insurer. The loss could be financial or not, but it must be measurable in terms of money. It typically involves something in which the insured has an insurable interest, which can be proven by ownership, possession, or a previous connection.


A contract known as an insurance policy is given to the insured outlining the terms and circumstances of the insurer's obligation to pay the insured. The premium is the sum of money the insurer charges the policyholder in exchange for the protection outlined in the insurance policy. The insured makes a claim to the insurer for processing by a claims adjuster if they sustain a loss that may be covered by the insurance policy. A deductible is an obligatory upfront cost imposed by an insurance policy prior to the insurer paying a claim (or if required by a health insurance policy, a copayment). By obtaining reinsurance, which involves another insurance company agreeing to assume part of the risks, the insurer can reduce its own risk, especially if the primary insurer determines that the risk is too great for it to bear.



Insurance companies may sell any combination of insurance types, but are often classified into three groups:

  • Companies that sell products like life insurance, annuities, and pensions that are related to asset management enterprises are called life insurance companies.
  • firms that sell property/casualty insurance or non-life insurance.
  • Health insurance providers that sporadically offer life insurance or employee perks
General insurance companies can be further divided into these sub categories.

  • Standard lines
  • Excess lines

Life and non-life insurers are typically subject to various regulatory frameworks, as well as different tax and accounting regulations. The fundamental distinction between the two types of businesses is due to the very long-term nature of the life, annuity, and pension business; insurance for life or a pension can cover risks over many decades. Non-life insurance coverage, in contrast, typically covers a shorter time frame, such as one year.


Mutual versus proprietary

Insurance providers are typically categorized as mutual or proprietary businesses. While stockholders (who may or may not own policies) own proprietary insurance firms, policyholders own mutual insurance businesses.

In several nations, including the United States, demutualization of mutual insurers to create stock corporations and the creation of a hybrid known as a mutual holding company became widespread in the late 20th century. Not all states, meanwhile, allow joint holding companies.


Reinsurance companies

Reinsurance firms are insurance firms that offer policies to other insurance firms so that they can lower their risks and guard against significant losses. A small number of very big corporations with enormous reserves control the majority of the reinsurance market. A direct writer of insurance risks might also be a reinsurer.

Captive insurance companies

Limited-purpose insurance firms with the specific goal of financing risks arising from their parent organization or groups are known as captive insurance companies. This term can occasionally be expanded to encompass some of the hazards associated with the clients of the parent company. It is, in essence, a form of internal self-insurance. A "mutual" captive insures the collective risks of members of an industry; a "association" captive self-insures the individual risks of the members of a professional, commercial, or industrial association; or a "pure" entity, which is a wholly owned subsidiary of the self-insured parent firm. Because of the cost reductions they contribute to, the simplicity of insurance risk management, and the flexibility for cash flow they produce, captives bring commercial, economic, and tax advantages to their sponsors. Additionally, they might offer affordable coverage for risks that are neither available nor offered in the conventional insurance market.


Property damage, public and product liability, professional indemnity, employee benefits, employers' liability, automobile and medical aid charges are just a few of the risks that a captive can underwrite for their parents. The use of reinsurance may help to reduce the captive's exposure to such risks.


The role of captives in their parent's risk financing and management strategy is becoming more and more crucial. When considered in light of the following context, this is clear:

  • Heavy and increasing premium costs in almost every line of coverage
  • Difficulties in insuring certain types of fortuitous risk
  • Differential coverage standards in various parts of the world
  • Rating structures which reflect market trends rather than individual loss experience
  • Insufficient credit for deductibles or loss control efforts


Other forms

Reciprocals, in which policyholders reciprocate by sharing risks, and Lloyd's organizations are two additional configurations for an insurance firm.


Admitted versus non-admitted

Insurance companies in the United States that have been accepted or granted a license by the state licensing body are known as acknowledged insurance companies. They market accepted insurance as their product. When admitted firms are unable or unwilling to fill a need for insurance, non-admitted companies are permitted to provide insurance under particular circumstances despite not having received state licensing agency approval.


Insurance consultants

There are organizations referred to as "insurance consultants." These businesses receive a charge from the customer to research various insurance policies from different firms, much like a mortgage broker. An "insurance broker" works with numerous insurance firms to get the best insurance policy, much like an insurance consultant. However, with insurance brokers, the payment is typically made through a commission from the chosen insurer rather than by the client.


Insurance transactions do not transfer any risks to insurance consultants or brokers because neither are insurance firms. Firms known as third party administrators provide insurance companies with underwriting and occasionally claims management services. These businesses frequently possess specialized knowledge that insurance firms do not.


Financial stability and rating

When purchasing an insurance contract, the strength and stability of the insurance provider should be taken into serious consideration. A current insurance premium provides protection against losses that could occur many years in the future. The insurance company's viability is crucial because of this. Several insurance businesses have gone bankrupt in recent years, leaving their consumers without coverage (or coverage only from a government-backed insurance pool or other arrangement with less attractive payouts for losses). Information is provided and the financial viability of insurance businesses is rated by a number of independent rating agencies.

Several organizations, including A. M. Best, rate insurance companies. The company's financial strength, which gauges its capacity to settle claims, is factored into the ratings. Bonds, notes, and securitization products, among other financial instruments issued by the insurance firm, are also rated.


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