National Health Insurance

I INTRODUCTION

National Health Insurance, government-operated system of insurance that provides financial benefits and medical services to people disabled by sickness or accident. National health insurance systems are found in many countries, particularly in Europe.

Systems of national health insurance frequently are coordinated with other national programmes of social insurance, such as pension programmes, programmes of unemployment insurance, and workers’ compensation.

II HISTORY

The first country to provide health insurance on a national scale was Germany. The German chancellor Prince Otto von Bismarck obtained passage of a compulsory sickness insurance law in 1883, which was financed by a state subsidy. Various types of national health insurance were adopted by other European countries, including Austria-Hungary later in the 19th century, Norway in 1909, Sweden in 1910, and Great Britain and Russia in 1911. After World War II the growth of national systems of health insurance in Europe was extensive, although a number of benefits, conditions of eligibility, treatment of dependents, and provisions for maternity care varied widely.

III GREAT BRITAIN

The British system of national health insurance, comprising social security and the National Health Service, was thoroughly reorganized after World War II and is one of the most comprehensive systems in operation. National health insurance is under the jurisdiction of the Department of Health and Social Security, which administers the payment of cash benefits for sickness and maternity. All employed and self-employed people up to the age of 65 are eligible for benefits, and the funds for the programme are derived from weekly contributions by employers and employees. Sickness benefits are payable up to pensionable age if a sufficient number of weekly contributions have been made. Maternity benefits include weekly allowances, before and after confinement, to women who ordinarily work, as well as certain cash grants.

The National Health Service administers the National Health Service Act, which went into effect in 1948. The cost of the programme is met largely from public funds. Benefits, which are of unlimited duration, include hospital services, general medical services outside hospitals, and local health services. Hospital services are provided in general and special hospitals, for in-patient, outpatient, and day-patient care, including the services of specialists. General medical services include those of general practitioners and dental, pharmaceutical, and ophthalmic services. The local health services include maternity and child welfare services, domiciliary nursing care, aftercare, immunization, and some mental-health services.

A person may use all the facilities of the National Health Service, or only a part of the service. He or she may, for example, make private arrangements with a practitioner for medical care and apply for free hospitalization. Practitioners are not required to participate in the programme. Those who participate and work outside of hospitals receive a fee for each patient as well as a basic practice allowance. Participating doctors may also engage in private practice. Almost all of the hospitals in Great Britain are administered by the National Health Service.

Controversial government reforms to the National Health Service were introduced in the 1980s and 1990s. These included the establishment of trusts, making NHS bodies self-governing purchasers of health care resources, and fundholding status for local practices, allowing general practitioners to manage and allocate their own resources. The overall aim was to bring the benefits of competition into the National Health service through an “internal market”, and to counteract bureaucratic inefficiency.

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National Health Service

I INTRODUCTION

National Health Service (NHS), the British institution, set up and run by the state, which aims to provide all aspects of health care for all citizens free at the point of use. It includes all levels of provision, from school nurses to the largest hospitals.

II HISTORY

The National Health Service was established in 1948 as a major part of the “welfare state” created by the Labour government of 1945-1951. It was a part of the social reforms recommended by the civil servant Sir William Beveridge, in the Beveridge Report of 1942. Previously, health care in the United Kingdom consisted of a mixture of charitable and private provision, the latter paid for by private and state-sponsored insurance.

The aim of the founders of the NHS was that the state should care for its citizens “from the cradle to the grave”. Its establishment involved the compulsory takeover of almost all health provision in the country. This was made simpler by the extensive powers of direction which government agencies had exercised during the war.

However, the NHS has been politically controversial from its outset: it was opposed by doctors before it began, and the government minister responsible for it, Aneurin Bevan, said that he had “stuffed their mouths with gold” in order to preclude opposition. In fact, he was compelled to compensate family doctors for their future inability to sell their practices when they retired; such sales had traditionally produced their retirement income. Bevan subsequently resigned in 1951, from a different Cabinet post, over the imposition of charges for “teeth and spectacles”. He was accompanied by his fellow ministers, Harold Wilson and John Freeman, although Wilson failed to abolish the same charges when he became prime minister in 1964. The charges are payable today, and in the 1980s the universal entitlement to free dental and ophthalmic tests was removed. A charge has also been introduced to drugs dispensed on a doctor’s prescription, although prescription charges were abolished in Wales in April 2007. There are exemptions from all these charges for people on low incomes and other nominated groups, such as children, students, and pregnant women. Changes to legislation were announced in 2003 to cut down on overseas visitors receiving free treatment. Only those permanently resident in the United Kingdom are eligible for free treatment, although pensioners who choose to spend up to six months living in another European country are eligible. Accident and emergency treatment remains free to all.

Commodity

Throughout the existence of the NHS, the private provision of health care has survived and mostly thrived. At one time, people sought private provision for the fringe advantages it offered, such as private rooms in hospital and the opportunity of a longer consultation with the specialist; it is now popular in addition because the increasing pressure on resources in the state system means that the private sector often provides much faster treatment and because modern insurance schemes, often paid for by employers, make private care affordable.

III STRUCTURE AND REFORM OF THE NHS

At its inception, the NHS was a centrally directed institution. The Secretary of State for Health controlled the service through a hierarchy of Regional, Area, and District Health Authorities, which provided the institutions of the NHS such as hospitals; and through a network of Family Practitioner Committees which organized the provision of General Practitioner (GP, family doctor) care. Patients were dealt with as they always had been, by attending their GP and being referred to a specialist at the hospital if such treatment was necessary. NHS management dealt with budgetary and financial matters, and these only impinged upon doctors’ work to the extent that facilities were or were not available.

In the 1970s, the concern that individuals mistreated by state bodies had no realistic source of redress led to the appointment of an ombudsman or Health Service Commissioner who was appointed with a brief to investigate complaints from the public of bad administration in the NHS. The holder of the post has always, in fact, been the same person as the Parliamentary Commissioner for Administration, the ombudsman for government generally.

Financial management in the NHS was, and remains, subject to consultation with non-financial concerns. The professional workers in the NHS are represented on local advisory committees, which give their views on the requirements of the local patient population. That population has its say in the Community Health Councils, which are formed from a variety of local interests. To an extent, these means of consultation have been sidelined by reforms in 1990 which concentrated on bringing financial decisions nearer to those who are affected by them, so that they might directly influence decision-making.

The 1990 reforms were intended to make the practices of the NHS more financially disciplined. The health care budget is enormous, and demand appears limitless; the intention of the reforms was to make it more apparent what resources were spent on what services, and to introduce an element of competition into the provision of services, thus reducing costs.

Besides some structural reforms (the Family Practitioner Committees became Family Health Service Authorities, and the Area Health Authorities were abolished), the reforms centred on creating “purchasing” and “providing” authorities. In each District Health Authority area, there is now a provider, who manages the service, and a purchaser, who determines what services are required for the patients in its area and negotiates with providers from its own and other District providers to obtain the service as efficiently as possible. The contracts so made are not enforceable at law, but there is an arbitration procedure.

In a further step, most provision is now made by trusts, which each consists of a health service unit. This is usually one or more hospitals, although it may be a bundle of services such as the mental health care in an area. The trust is to an extent autonomous and negotiates itself with the purchasing authority. Trusts can, in theory, make tenders for work done by other trusts; in practice, this does not mean the closure of the other trust’s infrastructure, but rather its takeover by new management.

The most radical reform has been the creation of fundholding general practices (comprising one or more GPS). In these cases, GPs are paid a sum to spend on each patient’s entire health care, and thus the GP becomes the purchaser of services so far as his or her patients are concerned. Partly as a consequence of these developments, and partly due to new concepts of health care delivery, the old distinction between primary GP care and hospital services is to an extent breaking down. Whereas GPs were once, in effect, gatekeepers, determining what and what not to pass on to the specialist services, they now provide a broader range of care at their practices. This has gone as far as the provision of minor surgery in some medical centres.

At the same time, smaller hospitals have tended to close or amalgamate with larger ones in the hope that the hospital system will consist of only the best examples of in-patient care. The fact that, for example, accident and emergency (“casualty”) provision may now be a considerable distance away for many people, has been justified by the observation that when there were much more, smaller, units, the expertise is shown in them was not always up to the best standards. The process began with the smallest cottage hospitals and extended to encompass all but the largest institutions. Some specialities, such as child health or maternity care, have retained their own dedicated institutions. Another development is the use of less in-patient treatment and shorter periods of stay for patients in the hospital.

Although the reforms may seem to have devolved much of the financial power within the NHS to a level nearer the grass roots, the service remains quite closely tied to the political centre. The health authorities and the trusts are controlled by people appointed by the Secretary of State for Health; even in the case of fund-holding GPs, their accession to that status is decided upon by the government-appointed Family Health Services authorities.

There is no simpler way to provide a service than to budget for and make provision according to hierarchical directives; inevitably the complexity of the new system has attracted controversy because it has required the appointment of more managers to run it. There is also criticism over the claim that a more commercial approach to health care has bred a commercial attitude in managers, particularly with regard to their own remuneration; and that making finance a priority, and allowing competition within the service, sits ill with a universal service providing equal treatment for all. It seems unlikely, however, that the principle of healthcare free at the point of use will be jeopardized. Whatever the organization and mode of delivery of the service, the evident public support for the NHS suggest that it will remain a permanent feature of social and political life in the United Kingdom.

Contributed By:
David Watson

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National Insurance

National Insurance, payments made by employers and employees in the United Kingdom to fund state benefits, such as unemployment pay and pensions. The money goes into a separate fund and technically does not form part of central government revenue. National insurance has some of the characteristics of a tax, though the payments employers and employees make are referred to as “contributions”. The distinction made by William Beveridge (the national insurance system set up in 1946 implemented proposals of the Beveridge Report) was “that taxation is or should be related to assumed capacity to pay rather than to the value of what the payer may expect to receive, while insurance contributions are or should be related to the value of the benefits and not to the capacity to pay”.

National insurance contributions are based on earnings; the percentage of earnings paid by employees is different from that paid by employers, and that paid by the self-employed is different again. Those earning below a certain amount do not have to pay national insurance at all and those earning more than a certain amount does not pay national insurance on earnings above that amount. In the case of someone earning just under £23,000 (the national insurance ceiling), the employee’s total national insurance contribution is currently set at just over £2,000, which is about 9 percent of earnings, and the employer’s contribution is higher (equivalent to slightly more than 10 percent of earnings). However, for those earning up to about £10,660, the employer’s contribution ranges from 3 to 7 per cent.

Many countries operate similar systems, in which there is a distinction between taxes that finance such things as public sector wages and compulsory social insurance that finances welfare benefits.

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Marine Insurance

Marine Insurance, insurance that generally applies to the risk associated with the transport of goods. Over time, marine insurance has become a mixture of broad property coverages, divided between land risks (inland marine) and sea risks (ocean marine).

Inland marine insurance covers domestic risks associated with some element of transport. It has been broadened to include perils incidental to the transport of property and now deals mostly with a personal and commercial property of a mobile nature. Its most familiar form is the personal articles “floater”, which offers an opportunity to insure many valuables, such as jewellery, furs, silverware, and fine arts, in a single policy.

Ocean marine insurance is broken into three basic types: hull (involving loss or damage to the ship); cargo (involving loss or damage to cargoes); and protection and indemnity (involving the liability of shipowners to others).

Hull insurance affords protection to owners of all types of ships for loss or damage to their waterborne property. Typical perils insured against are stranding, sinking, fire, and collision. The hull policy offers an unusual coverage under its collision clause, which provides liability insurance for loss or damage to the other vessel involved in a collision, as well as to its cargo.

Cargo insurance is available for shippers of goods moving by sea or air in international trade. The terms of insurance can be specific (for example, loss or damage resulting from sinking or fire) or “all risk” and can be underwritten for a single transaction (special policy) or on an open-ended contract (open cargo policy) for the international trader. The open cargo policy is the most common form used and usually covers the cargo “warehouse to warehouse”, thus including exposure to those risks that are associated with land transport as well.

When a ship is imperilled at sea because of fire, storm, or other danger, all efforts must be made to keep the ship afloat. Such efforts often cause damage to portions of the ship or cargo. To prevent inequity, each owner assumes a share of the property damaged or lost as a result of actions taken to save the ship. This method of apportioning losses is known as general averaging.

Protection and indemnity (called P & I) insurance protects the vessel owners against their liability for damage to cargo in their care and custody; death or injury to passengers, crew, cargo loaders, and others; damage caused to piers, docks, underwater cables, and bridges; and, more recently, damage caused by pollution.

Other forms of related coverages are included in ocean marine insurance, such as miscellaneous liability policies for owners of piers, docks, marine repair facilities, marinas, and shipyards. Policies on yachts can be underwritten by an ocean marine insurer (usually for larger pleasure craft), providing property and liability insurance in one policy. Powerboats and smaller pleasure craft are more often insured by inland marine insurers. Builder’s risk insurance is available to cover damage to a ship under construction.

Common exclusions found in marine insurance policies are loss or damage resulting from strikes, riots, civil commotions, and war. These risks can be, and frequently are, insured through the use of endorsements for additional premiums.

Ocean marine insurance rates and policy forms are not regulated by any government authority, only by norms operating within the shipping industry. Coverage can be tailored to suit the individual needs of ship and cargo owners, and rates are based on the underwriter’s experience and judgement in a competitive worldwide marketplace.

Underwriters consider many factors in setting terms and rates for a risk. Factors common to all marine policies are the underwriter’s experience with a commodity or vessel, the cargo owner’s or shipowner’s loss history, and current competition in the industry. Important factors relating to the ship include owner management, crew experience, trade routes, ports frequented, and age and maintenance of a vessel.

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Life Insurance

I INTRODUCTION

Life Insurance, assumption by the an insuring organization of the risk of death of a policyholder. Unlike loss in insurance on property, loss in life insurance is certain to occur and is total. The element of uncertainty is when death will occur. Mortality is subject to the laws of probability, however, and life-insurance premiums can be calculated from mortality tables, which indicate the average number of people in each age and gender group that will die each year. A person trained to make such calculations, known as an actuary, determines the amount of premiums to be collected yearly from each group in order for the principal (the premiums) and its earned interest to equal the benefits to be paid to the policyholders’ beneficiaries. The principal payment required annually constitutes the net premium. A loading charge to cover company expenses and contingencies is added to the net premium, yielding the total, or gross premium, which the insured pays.

II HISTORY

The earliest known type of life insurance was the burial benefits that Greek and Roman religious societies provided for their members. Neither these religious societies nor any pre-modern systems for paying death benefits employed actuarial calculations. They were frequently financed on a post-assessment basis; that is, contributions were made by all surviving members following one member’s death. As a result, funds were not always available to pay claims.

The tontine annuity system, founded in Paris by the 17th-century Italian-born banker Lorenzo Tonti, although essentially a form of gambling, has been regarded as an early attempt to use the law of averages and the principle of life expectancies in establishing annuities. Under the tontine system, associations of individuals were formed without any reference to age, and a fund was created by equal contributions from each member. The sum was invested, and at the end of each year the interest was divided among the survivors. The last remaining survivor received both the year’s interest and the entire amount of the principal. Modern life insurance has achieved global popularity. It is most popular in Ireland, Belgium, the Netherlands, the United States, Canada, Australia, New Zealand, South Korea, and Japan. In these countries the face value of current life insurance policies is usually greater than the national income.

III TYPES OF LIFE INSURANCE

Life insurance may be classified in a variety of ways. A classification depending primarily on the manner in which the premium is collected comprises ordinary, debit, and group life insurance. Ordinary insurance can be further classified into whole life, limited-payment life, endowment, and term. Debit life insurance can be classified into debit ordinary and industrial. Classification by type of contract yields term, whole life, and universal life. Life insurance may also be classified as participating and non-participating, depending on whether or not the policyholder shares in the savings or the profits of the insurer.

IV ORDINARY LIFE INSURANCE

Ordinary life insurance may be used to provide a lump sum or continuing income to family beneficiaries, or it may be used by a firm to insure the life of a business executive. Premiums are paid on a periodic basis. With the exception of term life insurance, ordinary life insurance builds cash values that can be borrowed to help families meet emergencies or take advantage of business opportunities. A medical examination usually is required to buy life insurance. Almost all ordinary policies are sold on a level premium basis, which means that premiums in the early years are greater than the value of the insurance. This is not a true overcharge, but is designed to compensate for the greater costs in later years, when mortality rates increase.

V WHOLE-LIFE INSURANCE

Whole life insurance provides for the payment of the face amount of the policy on the death of the insured, whenever it might occur. Premium payments are made during the entire lifetime of the insured person; this differs from limited-payment and endowment policies. The cash value of the policy, which is less than its face value, is paid when the contract matures or is surrendered.

All cash-value policies like whole life, endowment, and limited payment life are required to provide values that cannot be lost should the insured terminate the policy. Such benefits provide that the insured may obtain the cash surrender value and terminate the policy; or the insured may obtain a paid-up whole life policy in a reduced amount; or he or she may obtain term insurance for the full face amount of the policy for a specified period. A loan provision in all such policies permits the insured to borrow up to the full amount of the cash surrender value at any time, subject to specified limitations.

VI LIMITED-PAYMENT LIFE INSURANCE

The limited payment life policy is a subtype of whole-life policy providing for premium payments for a specified number of years (for example, 10 or 20, or until age 65) unless the insured person dies sooner. The policy remains effective once paid for, unless surrendered. A single-premium life policy is a special case of a limited-payment policy. Premium rates for limited-payment policies are higher than for ordinary life insurance policies because the paying-in period is shorter.

VII ENDOWMENT INSURANCE

Endowment policies are payable at the death of the insured or on a specified maturity date if the insured is alive. Premiums generally are payable from the date of issue until the date of maturity but may be limited to fewer years or even to a single lump-sum payment. Premium payments on endowments are high because a large cash value is built up in a relatively short time. Endowments combine savings with insurance, and such policies may be used to provide for education, mortgage payments, or retirement purposes.

VIII TERM LIFE INSURANCE

Term insurance provides benefits only if the insured dies within a specified period. If the insured survives up to the end of the specified period, the contract is terminated unless renewed. Because the premium for a term policy pays only for the cost of the insurance protection during the term of the policy, term insurance generally has no cash surrender value. The insured may be allowed to renew for another term without a medical examination. The premium, however, increases with each renewal because it is calculated on the age of the insured at the time of renewal.

Term insurance is often used by the head of a family to obtain additional temporary insurance when the children are young. Term insurance policies frequently provide the insured with conversion options to whole-life policies. Credit life insurance is term insurance against a loan taken out on some major purchase such as a car. It generally decreases in amount as the loan is repaid. It protects the insurer as well as the lender against the debt that remains unpaid at death.

IX UNIVERSAL LIFE INSURANCE

Universal life insurance, a type first introduced in the United States in the 1970s, allows the policyholder to decide details of the premium (size and frequency) and the amount of death benefits. Policies may yield either a set benefit or a fixed sum plus any cash value accumulated in the policy. The insurer charges for general expenses and mortality costs and credits the policyholder with any interest earned, which usually gives an interest rate equivalent to mortgages and long-term bonds. If protection requirements change in the course of time, the policyholder can have the policy terms altered.

X DEBIT LIFE INSURANCE

Two types of debit life insurance are available. Debit ordinary insurance was designed for wage earners with modest incomes. Premiums are collected by company agents at policyholders’ homes. Other than this mode of collection, the coverage has the same characteristics as ordinary life insurance. Industrial life insurance is also designed to meet the needs of low-income industrial workers. Premiums are payable periodically.

XI GROUP LIFE INSURANCE

Group life insurance is often included as a fringe benefit in collective bargaining agreements, or as a benefit for employees. It provides a means of insuring a number of people in a business establishment, society, or other organization. This form of insurance is common in Japan, as part of the tradition of lifetime employment, and nearly all Japanese life insurance companies offer group schemes.

A master contract is issued, and each insured person receives a certificate specifying the amount of the insurance and his or her beneficiary. Employer and employee may each pay a set portion of the premium, or the employer may pay the whole; the amount of insurance is usually proportionate to seniority and salary. Because group insurance is a form of wholesale buying with low incurred costs, its economies are passed on to policyholders in the form of lower premiums. It does not usually require a medical examination. Group insurance policies are normally convertible to individual policies upon leaving the establishment.

XII COMBINATION POLICIES

The variety of policies available in modern life insurance allows for tailor-made combinations made to suit customers’ needs. Especially common are family income policies, where a whole-life policy is combined with term life insurance to yield an income over a set period, often the period when children are young. A similar policy, the mortgage protection policy, provides for income to pay off a mortgage on a property, usually with the term insurance decreasing as the mortgage is paid. In each case the whole-life policy is unaffected by the parallel term policy.

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Liability Insurance & Accident Insurance

Liability Insurance, type of insurance used to cover the risk of incurring legal liability to pay money damages. Such insurance guarantees financial protection to an insured party who might be required to pay damages resulting from negligence. The negligent act may be one that causes personal injury, death, or property damage. Liability for negligence may result not only from the conduct of the insured but also from the conduct of his or her agents and employees. Acts of negligence resulting in liability occur in connection with a wide variety of private and commercial activities, such as the operation of a motor vehicle, the conduct of a business, and the ownership or occupancy of the property. Liability insurance sometimes is called third-party insurance, because the insurance company protects the insured against suit by a third party, that is, the claimant.

A policy of liability insurance generally provides for investigation, negotiations for private settlement of claims, the defense of suits brought against the insured, and the payment of judgments or judicially approved settlements up to the limits specified in the policy. Ordinarily, the assistance and cooperation of the insured are required in the defence against the claim.

Since legal liability may arise in many situations, liability policies usually do not assume all the risks of liability.

Accident Insurance

Accident Insurance covers the insured party against accidents, usually caused by himself or herself. It is compulsory in most countries, including the United Kingdom, Australia, and New Zealand, for employers and drivers of motor cars to have insurance to cover any damage to others for which they may be responsible. However, the major insurers in the United Kingdom have set up the Motor Insurers’ Bureau, which provides cover if the negligent driver is uninsured or cannot be identified. These provisions have made courts more willing to find that injuries to a person in an accident were caused by negligence so that the person receives compensation. Under the Road Traffic (NHS Charges) Act of 1999, where compensation has been paid out, the treatment costs incurred by a hospital in treating a traffic accident victim can be reclaimed from the compensator.

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Insurance

I INTRODUCTION

Insurance, in law and business, the contractual arrangement that provides for compensation by an insurer to an insured party if or when a specified set of circumstances occurs. Such circumstances may include death or personal injury, accident, unemployment or old age, loss of or damage to property, or any one of a number of instances that can be compensated for financially. The insurer conducts its operations by amassing relatively small contributions from many people who are exposed to the risk of occurrence of an unforeseen event in order to create a fund that is used to reimburse those insured who actually suffer from such an occurrence. The contributions of the policyholders are called premiums. A contract of insurance is embodied in a policy that specifies the terms under which the insurer agrees to indemnify the policyholder for loss in consideration of the payment of a stated premium or premiums. For specific details on Life Insurance, see that article.

II INSURANCE POLICIES

An insurance contract often contains an element of contingency, that is, the event insured against must be possible but not certain to occur in a given period of time and must be substantially beyond the control of either insured or insurer. However, this is clearly not so in those cases where, for example, insurance policies are used as a form of old-age pension and the contingency element of reaching a certain age is negligible. Generally, the number of risks involved must be sufficient to compute the chances of occurrence of the event based on the law of averages, and thereby to determine the amount of premium required. In addition to the requirement that the risk is contingent, the policyholder must generally have an insurable interest, that is, the policyholder must be one who would suffer a material loss by the happening of the event. A policy in which the insured does not have such an interest would be deemed a gambling contract and therefore void; an example of such a void policy is one by which a person insured the house of a stranger against fire.

III PROTECTION

Insurance plays a major role in the modern economy, providing an orderly means for the replacement of property lost or destroyed and for sustaining purchasing power adversely affected by illness, injury, or death. Moreover, the huge reserves accumulated by insurance companies to meet expected claims are invested, thus providing the industry with needed funds for capital expansion or other investments.

Insurance companies constantly search for the additional business by providing insurance protection against new types of hazards. Most standard homeowners’ policies do not protect against catastrophes, such as earthquakes, nuclear explosion or radiation, war, and certain other perils. Over the past decade, however, insurance companies have provided a wider range of coverage to their clients and it is now possible to insure against most eventualities.

IV TYPES OF INSURANCE

Perils often covered by insurance include burglary and theft, vehicle collision, and dishonesty of employees (fidelity insurance). Forms of insurance such as life insurance or maritime insurance are effectively whole subtypes of insurance, with their own norms. Insurance is also available to cover the extension of credit and to guarantee the title to a property, or as part of a mortgage policy. In addition, specialized types of insurance cover damage to glass, boilers, and machinery, lifts, animals, and other property, as well as losses to property arising from lightning, wind, tornadoes, hail, storms, insects, blight, bombardment, explosion, and water damage. Many insurance policies are comprehensive, that is, they cover a group of related perils; but most also have exclusion clauses, detailing what events are not covered by the policy.

V TYPES OF INSURERS

A variety of organizations, chiefly commercial but including some fraternal or non-profit bodies, underwrite insurance. Insurance companies are owned by their shareholders, who in return for providing the company with capital by their share purchases, share in the profits in the form of dividends. Mutual insurance companies, however, do not issue shares but operate solely on the money obtained as premiums; these organizations are owned by the policyholders, who share in the profits and losses.

Under the Lloyd’s type of insuring organization, patterned after the celebrated British firm of Lloyd’s, a number of individuals (generally grouped into syndicates which act on their behalf) each agree to accept a portion of a risk for a specified premium and to share in the profit or loss in proportion to the percentage of the risk assumed. Non-profit insurance corporations are cooperatives maintained and operated for the benefit of their members and subscribers. Welfare insurance plans generally are trust funds established or maintained in some countries by employers and their employees to provide life insurance, health benefits, and pensions to employees.

In addition to the private insurance organizations described above, certain types of insurance are provided in most countries by governmental organizations. Notable examples include social security and health insurance, although in many countries government insurance is only partial, with the individual having to bear some risk. Partial insurance can help overcome “moral hazard” problems. That is, if a person is completely insured against a loss, the probability of which can be influenced by his or her actions, then there will be little incentive to take care, which would raise the cost of insurance greatly.

VI REINSURANCE

In order to avoid retaining the full amount of insurance on risks, insurers frequently resort to reinsurance; that is, they pay a premium to another insurer, who then assumes part of the risk. Based on the same principle as insurance itself, reinsurance is a mechanism to provide for a further sharing of the risk so as to help insurance companies meet their obligations to policyholders. Reinsurance has proved a fertile but volatile field for some insurers and contributed to the serious problems experienced in the 1990s by Lloyd’s of London.

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Marketing

I INTRODUCTION

Marketing, the process of identifying, anticipating, and satisfying customer requirements for consumer goods or services. Early marketing techniques involved little more than making potential consumers aware of a product’s existence and benefits, and getting it to the market. Now, however, the marketing process starts even before decisions are taken about what products should be made.

Marketing concentrates on the buyers, or consumers, determining their needs and desires, educating them with regard to the availability of products and too important product features, developing strategies to persuade them to buy, enhancing their satisfaction with a purchase, and, finally, building trust and long-term relationships with them where appropriate. Marketing also looks to create successful brands to which customers are attracted and remain “loyal”. Strong brands are increasingly important for businesses, as long-term relationships with consumers generate greater profits.

Marketing management includes researching, planning, organizing, directing, and controlling decision-making regarding product lines, pricing, promotion, and servicing. In most of these areas, the marketing department has complete control; in others, as in product-line development, its function is primarily advisory. In addition, the marketing department of a business is responsible for the physical distribution of the products, determining the channels that will be used, and supervising the efficient flow of goods from the factory or warehouse.

II TAILORING THE PRODUCT

Merchandise generally similar in appearance, that is, in style or design, but varying in such elements as size, price, and quality is collectively known as a product line. Product lines must be planned according to consumer needs and wants.

In order to develop a line effectively, market research is conducted to study consumer behaviour. Changing attitudes and modes of living directly affect the demand for products. For example, greater awareness of the importance of eating healthily has led to a decline in demand for foods such as crisps and chocolate bars.

Also, a high-income economy triggers a demand for products very different from those selected in a declining business cycle. The availability or lack of disposable income, meaning income over and above that spent for basic necessities such as food, shelter, and clothing, affects the buying pattern for so-called luxury products. Similarly, the purchase of durable or long-lived goods, such as refrigerators, cars, and houses, may be deferred when the economy is declining and may increase rapidly in periods of prosperity. Staple products, such as food and clothing, tend not to be seriously affected by the business cycle.

The life cycles of products require careful study. Virtually all product ideas lose in time the attraction that initially drew people to buy them. Technological changes can speed up this process, as some producers of video cassette recorders and 35-mm film cameras have found. Manufacturers may also accelerate the obsolescence of a product by introducing new, more desirable products or versions of the existing product. Consumers today expect product innovations and tend to react favourably to new features. This has an important bearing on the usable life deliberately designed into a product, which in turn has a significant effect on the costs to the manufacturer and ultimately on the price to the consumer. Competition between manufacturers of similar products naturally accelerates the speed of changes made in those products.

III PRICING THE PRODUCT

The two basic components that affect product pricing are costs of manufacture and competition in selling. It is unprofitable to sell a product below the manufacturer’s production costs and unfeasible to sell it at a price higher than that at which comparable merchandise is being offered.

Other variables also affect pricing. Company pricing policy may require a minimum profit on new product lines or a specified return on investments, or discounts may be offered on purchases in quantity. Pricing is also affected by the image the company wants to create in consumers’ minds. Companies such as ASDA Wal-Mart or Primark purposefully set their prices low as they seek to attract those customers looking for a bargain or value for money. In contrast, companies at the top end of the market are more likely to deliberately charge higher prices, to emphasize their high quality or exclusivity.

Attempts to fix resale prices normally violate competition laws, which usually prohibit manufacturers from controlling the prices set by wholesalers and retailers. Such control can still be maintained, however, if the manufacturers market directly through their own outlets.

Attempts have also been made, generally at government insistence, to maintain product price competition in order to minimize the danger of injuring small businesses. Therefore, pricing decisions are reviewed by the legal department of the marketing organization.

IV PROMOTING THE PRODUCT

Advertising, personal (face-to-face) selling, sales promotion, direct marketing, and public relations are all techniques that can be used to persuade people or organizations to buy.

A Advertising

The primary objective of advertising is to raise awareness of a product or brand. Although a company may have an excellent product that meets customers’ needs and is competitively priced if no-one knows of its existence the company will struggle to make enough sales.

Most companies consider this function so important that they allocate extensive budgets and engage specialist advertising agencies in developing their programme of advertising. By repeatedly exposing the consumer to a brand name or trademark, to the appearance or package of a product, and to special features of an item, advertisers hope to incline consumers towards their particular product or brand. Advertising is most frequently done on television, radio, the Internet, and billboards or other large displays; in newspapers, magazines, and catalogues; and through direct mail to consumers. In recent years, advertising agencies have been joining forces to become giants, making it possible for them to offer their clients a comprehensive range of worldwide promotion services.

B Personal Selling

As the costs of personal selling have risen, the role of salespeople has changed. It is relatively rare now for salespeople to need to explain in detail how a product works and why it is needed; consumers can usually find out this information themselves through the Internet. Instead, their role tends to focus on persuading consumers to buy their product rather than a competing brand, and on negotiating price and arranging terms of payment.

Personal selling remains an important means for selling between businesses. Businesses often have specific needs and concerns, which are most effectively addressed through personal selling. It also has the benefit of helping to build and strengthen relationships, helping to increase sales in the long term.

C Sales Promotion

The purpose of sales promotion is to get people or organizations to try a product or service. An incentive to buy is given, in the hope that consumers or organizations will like the product or service and buy it again and again. Sales promotions are often used in conjunction with advertising.

Often it is necessary to work closely with the dealers who handle a manufacturer’s products to make sure that satisfactory sales levels are achieved. Displays must be supplied and set up, and cooperative advertising programmes may be worked out. Shop staff should be trained so that they have knowledge of the manufacturer’s products. Often the manufacturer must provide services such as installation and maintenance for a specified time period. On the consumer level, sales promotion may involve special merchandising inducements such as discount coupons, contests, a premium (gift) with the purchase of a product, or a lower price on the purchase of a second item.

D Direct Marketing

Companies use direct marketing to communicate directly with their customers, rather than going through intermediaries such as retailers. It is an enormous growth area in marketing and includes the following activities: direct mail, telemarketing, direct response TV, and e-mail. It is an attractive communication tool as it allows a company to use a personalized approach, which is more warmly received by customers than unpersonalized messages. As technology improves, marketers are able to target their messages, products, and promotions more closely to individual customer needs and desires. It is also an effective way to build up and develop longer-term relationships with customers.

Direct marketing has become so popular that its benefits are now being diminished. The sheer volume of direct mail and e-mails now sent to consumers is increasingly overwhelming and unwelcome. Direct mail is commonly referred to as “junk” mail, as many consumers simply throw it away without opening it, while e-mails are referred to as “spam”. Consumers in the United kingdom can now sign up to the Mail Preference Service or Telephone Preference Service, which forbid companies from contacting them unless they have been given the consumer’s permission. Many consumers in the United Kingdom have already signed up and as a result, many companies are becoming increasingly limited in who they are able to contact. Developing on-going relationships with consumers where such communications are permitted has become more and more important for companies.

E Public Relations

Public relations, or PR, is used by companies to improve their image with various publics, usually consumers, society, and investors. Public relations seeks to influence the way an organization or brand is portrayed or perceived, either to generate goodwill or positive coverage of the company and its products or to combat any negative stories appearing in the press. Public relations activity can be as simple as sending out press releases to newspapers and relevant publications, through to carefully managed and on-going awareness campaigns. It is cheaper than other communication tools such as advertising, as any coverage given is not paid for. Because the coverage appears in independent or impartial publications, rather than direct from the company, it is more likely to be trusted by consumers and can, therefore, be a highly effective and persuasive means of communication.

V DISTRIBUTING THE PRODUCT

Some products are marketed most effectively by direct sale from manufacturer to consumer. Among these are durable equipment—for example, computers, office equipment, and industrial machinery and supplies. However, many consumer goods are also sold directly to the public as well, through advertisements, telemarketing, “house parties”, and the Internet.

The Internet has had a profound effect on distribution and how companies reach consumers. Many companies are now able to sell their goods direct to people around the world via the Internet and online ordering facilities. Company websites often provide detailed product information and answers to Frequently Asked Questions (FAQs). Credit cards have made it easy for people to purchase via the Internet, mail, or telephone. Through the Internet, consumers from anywhere in the world can shop and buy goods from a company, at any time that suits them. Comparison shopping has also been made easier by websites that check product details and prices across a range of retailers, with the result that price competition among companies has intensified.

Sales via the Internet are attractive to companies as the process is often automated, meaning that orders can be processed quicker and more cheaply than was previously possible.

The Internet also offers a more dynamic and direct means of reaching customers than through traditional retail outlets. It enables a two-way dialogue between the customer and the company to take place and can help to resolve queries or problems more speedily. It therefore also helps in building and developing longer-term relationships, in a way that other outlets cannot.

Despite the phenomenal growth in direct sales via the Internet, most consumer products still move from the manufacturer through agents to wholesalers and then to retailers, before ultimately reaching the consumer. Determining how products should move through wholesale and retail organizations is a crucial marketing decision.

Wholesalers distribute goods in large quantities, usually to retailers, for resale. Some retail businesses have grown so large, however, that they have found it more profitable to bypass the wholesaler and deal directly with the manufacturers or their agents. Wholesalers first responded to this trend by adapting their operations so that they moved faster and called for a lower margin of profit. Small retailers fought back through cooperative wholesaling, the voluntary banding together of independent retailers to market a product. The result has been a trend towards a much closer, interlocking relationship between the wholesaler and independent retailer.

Retailing has undergone even more change. Intensive pre-selling by manufacturers and the development of minimum-service operations—for example, self-service in department stores—have drastically changed the retailer’s way of doing business. Supermarkets have become commonplace not only for groceries but for products as diverse as books, medicines, clothes, and electronic equipment. Warehouse retailing has become a major means of retailing higher-priced consumer goods such as furniture, appliances, and electronic equipment. The emphasis is on generating shop traffic, speeding up the transaction, and rapidly expanding the sales volume. Chain stores—groups of shops owned by the same firm—and cooperative groups have also proliferated. Special types of retailing, for example, vending machines and convenience stores, have also developed to satisfy consumers’ needs more easily and cheaply.

Transporting and warehousing merchandise are also technically within the purview of marketing. Products are often moved several times as they go from producer to consumer. Products are carried by rail, lorry, ship, aeroplane, and pipeline. Efficient traffic management determines the best method and timetable of shipment for any particular product.

VI SERVICES AND MARKETING

Services are intangible goods, which can be sold despite not being actual objects. Consumers pay for a service as they would for manufactured goods. Already more people are employed in the developed economies in the provision of services than in the manufacture of products, and the service sector shows every indication of expanding even further. Services familiar to most consumers are in the fields of maintenance and repair, transport, travel, entertainment, education, and medical care. Business-oriented services include computer applications, management consulting, banking, accounting and legal services, stock brokerage, and advertising.

Services, like products, require marketing. Those members of staff who are responsible for delivering the service are extremely important in marketing services, as they will to a large degree shape the customer’s experience of that service. Likewise, service quality, the delivery of consistently good service, is also important if a company wants customers to use its services again.

As with products, services too must be planned and developed carefully to meet consumer demand. For example, in the field of temporary personnel, a service that continues to increase in monetary value, studies are made to determine the types of employee skills needed in various geographical locations and fields of business. Because intangibles are more difficult to sell than physical products, promotional campaigns for services often have to try harder to encourage trial and take up. Through extensive promotion, temporary-personnel agencies have convinced many companies that hiring on a temporary basis only in times of need is more economical than hiring permanent, full-time personnel.

VII MARKET RESEARCH

Market research involves the use of surveys, tests, and statistical studies to analyse consumer trends and to forecast the size and location of markets for specific products or services. The social sciences are increasingly utilized in customer research. Psychology and sociology, anthropology, and even neurology can provide clues as to people’s activities, circumstances, wants desires, and general motivation. They, therefore, play a key role in understanding the various behavioural patterns of consumers.

Coupled with applications from the social sciences has been the introduction of modern measuring methods when surveys are carried out to determine the extent of markets for a particular product. These methods include the use of statistics and the utilization of computer models to determine trends in consumers’ desires for various products. Scientific analysis is being used in such areas as product development, particularly in evaluating the sales potential of new product ideas. For example, use is made of mathematical models—that is, theory-based projections of social behaviour in a particular social relationship. Sales projections become the basis for many important marketing decisions, including those relating to the type and extent of advertising, the allocation of salespeople, and the number and location of warehouses.

VIII FORCES AFFECTING MODERN MARKETING

An important influence on marketing theory is the continuous and rapid change in consumer interests and desires. Consumers today are more sophisticated than ever before. They are in education for much longer; they are exposed to the Internet, newspapers, magazines, films, radio, television, and travel; and they have much greater interaction with other people. Their demands are more exacting, and their taste is more volatile. They are safeguarded against the blandishments of indiscriminate marketing by consumer protection schemes, and they are better informed, thanks to publications dedicated to evaluating the merits and faults of different products.

Markets tend to be segmented as each group calls for products suited to its particular tastes. Positioning the product—that is, determining the exact segment of the population that is likely to buy a product, and then developing a marketing campaign to enhance the product’s image to fit that particular segment—requires great care and planning.

The number of ways marketers can reach consumers has exploded over the past few decades, with countless magazines, publications, radio stations, digital and satellite channels, and soon broadband TV, available to people. This “media fragmentation” has meant that it is harder than ever for marketers to get their messages across to a large number of consumers, as the audience for each TV channel or publication steadily drops. At the same time, as consumers have become exposed to greater and greater amounts of advertising, so they have become more and more resistant to it. Many consumers now actively seek to avoid advertising if they can, for example by changing channels during the ad break, or skipping through the breaks on recorded programmes. In response, marketing has looked to develop on-going, longer-term relationships with customers, where their communications are welcomed rather than resented.

Competition has also sharply intensified, as the number of firms engaged in producing similar products has increased. The advent of the Internet has brought global competition to even the smallest business. In response, firms have tried to differentiate their products from those of their competitors. Profit margins—the percentage of profit made by a business per unit of sales—are constantly being cut. While costs continue to rise, competition tends to keep prices down. The result is a narrowing spread between costs and selling prices, and an increase in a business’s sales volume is necessary to maintain or increase profit.

Companies have also responded to greater competition by building stronger brands to which the consumers stay loyal. Brands have become increasingly important in marketing, as they help companies to generate goodwill, develop customer loyalty, and increase profits. Although intangible, brands can now be recorded on a company’s balance sheet, and in some cases can be worth more than the physical assets of a company.

The consumer movement—that is, the insistence on reputable products and services by consumer groups—is a strong influence on marketing techniques. Both consumer groups and government agencies have intensified their scrutiny of products, challenging such diverse elements as product design, length and legitimacy of warranty, and promotional tactics. Warranty and guarantee practices, in particular, have been closely examined. New legislation has generally defined and extended the manufacturer’s responsibility for product performance.

Environmental concerns have also affected product design and marketing, especially as the expense of product modification has increased the retail cost. Such forces, which have added to the friction between producer and consumer, must be understood by the marketer and integrated into a sound marketing programme. This is often accomplished by emphasizing the “environmental friendliness” of a product or incorporating environmental considerations into initial marketing decisions prior to manufacture.

Even the way a firm handles itself in public life, that is, how it reacts to social and political issues, has become significant. Information about companies and their actions across the world is now easily accessible to consumers via the Internet, and this has led to increased calls for transparency. As a result, corporate social responsibility is becoming an increasingly important issue for many companies. No longer may a corporation cloak its internal decisions as private affairs. The public’s dissatisfaction with the actions and attitudes of a firm has sometimes led to a reduction in sales; conversely, consumer enthusiasm, generated by a firm’s intentional establishment of a good public image or public relations, has led to increased sales.

IX SPECIALIZED MARKETING DEVELOPMENTS

The success of specialized marketing developments has caused many older organizations to revise their operating methods. In recent years, for example, franchising has become an important force in retailing. Under this plan, the retailer is given the right to sell, within a certain area, without competition from another retailer dealing in the same product.

Many consumers now find it more desirable to rent products than to purchase them outright. For example, a homeowner will often find it preferable to rent an electric floor polisher when needed, rather than purchase the appliance at the list price, use it only infrequently, and then have to provide storage space within the home. Another item that consumers have sometimes found easier and less expensive to rent in certain circumstances (when abroad, for instance) is the car. The renting of equipment also figures in the large industry. Corporations are finding it to their economic advantage to rent computers and office and industrial machinery, thereby assuring themselves of product servicing and repair and allowing a changeover, without great expense, to newer equipment models as they become available.

The use of credit has had a great impact on marketing. Customers with credit cards can make purchases without the normal immediate presentation of cash, and sales are thus stimulated. Shops often further stimulate sales by the use of premium promotions whereby customers making purchases receive free goods or the opportunity to buy special merchandise at very low prices.

Businesses must strive daily to outdo competitors. The methods available to businesses for distinguishing their commodity from others in the market are subject only to their ingenuity. Such methods may include product improvement, a unique promotional campaign, a new twist in servicing, a change in distribution channels, or an enticing price adjustment.

X THE MARKETING PROFESSION

Perhaps nothing is more conducive to the success of a firm than the image that it conveys of itself to the public. The marketing activities of a company, because they act directly on the consumer, do most to shape this image and thus must be developed with great care.

In a world of shifting consumer needs and desires, it is marketing that acts as the vital interface between an organization and its customers, looking outwards from the organization to determine future customer needs and developing suitable strategies to respond to those needs.

As marketing has become increasingly complex, a need has arisen for executives trained in the social sciences who also possess statistical, mathematical, and computer backgrounds. Courses are offered at undergraduate and graduate levels in such specialized fields as advertising, administrative practices, financial management, production, human relations, retailing, and personnel administration.

In recent years, as global competition between industries has intensified, the role of marketing departments has been seen as increasingly important. As competition continues to increase and brands battle it out for supremacy, the marketing profession is likely to provide more personnel in the ranks of top management.

Reviewed By:
Chartered Institute of Marketing

Credited Images: Yesstyle

Note: The Yesstyle is a parter with Economic Day

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E-Commerce

E-Commerce, the abbreviation for electronic commerce, usually defined as the conduct of business online, via the Internet. Until recently, e-commerce was limited mainly to large companies and their suppliers, who connected their computers together to speed up ordering and payment systems. Today, millions of people are involved in e-commerce on the Internet—when, for example, they visit World Wide Web sites to buy books or CDs, order flowers or pizzas, or check their bank accounts.

In the narrow definition of e-commerce, the term covers the buying and selling of goods and services using computer communications. This might be done via a messaging system such as electronic mail (see Office Systems), via the World Wide Web, or by direct computer-to-computer communications. Direct communications may use a standard form of electronic data interchange (EDI) such as Edifact (EDI For Administration, Commerce, and Trade).

Successful e-commerce ultimately leads to some form of payment, and ideally this will involve ‘electronic funds transfer’ (EFT): in other words, the payment will be made via an electronic message, not in a physical form such as cash or a cheque. So-called smart cards and stored value cards (credit cards that contain a microchip, telephone cards, and so on) should, therefore, be considered part of e-commerce. The communications element may not always be obvious, but somewhere in the background, computer accounts are usually being credited and debited.

The broadest definitions of e-commerce may also include other electronic forms of doing business, such as fax, Telex (see Telegraph), video conferencing, and even telephone calls. Usually, these are not e-commerce, but they could be regarded as such, depending on how they are used.

Companies invest in e-commerce systems to eliminate human input: orders and payments are made by machines rather than by people. This has several advantages. It cuts the cost of each transaction; speeds it up; and also makes it more convenient, because transactions can be performed at any hour of the day or night, often regardless of location.

The key question, then, in describing a transaction as an example of e-commerce is not which communications system is used, but whether or not the transaction has been automated. With a telephone-based bank account, for example, a user may wish to make a payment via the telephone. If a human assistant takes the instruction and types it into the bank’s computer, that cannot be described as e-commerce. However, if the call is answered by a speech recognition system (software running on a computer), which verifies the user’s identity and makes the payment without human involvement, that is e-commerce. Much e-commerce may soon be performed using a mixture of voice recognition and text messaging from mobile telephones (see Cellular Radio).

Contributed By:
Jack Schofield

Credited Images: Yesstyle

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New Age Movement

New Age Movement, broad-based amalgam of diverse spiritual, social, and political elements with the common aim of transforming individuals and society through spiritual awareness. The New Age is a utopian vision, an era of harmony and progress. Comprising individuals, activist groups, businesses, professional groups, and spiritual leaders and followers, the movement brought feminist, ecological, spiritual, and human-potential concerns into the mainstream in the 1980s, creating a large market in various countries for books, magazines, audio- and videotapes, workshops, retreats, and expositions on the subject, as well as for natural foods, crystals, and meditation and healing aids.

Often seen as resurgent paganism or Gnosticism, the modern movement has more recent roots in 19th-century spiritualism and in the 1960s counter-culture, which rejected materialism in favour of Eastern mysticism and preferred direct spiritual experience to organized religion. Techniques for self-improvement and the idea that the individual is responsible for and capable of everything from self-healing to creating the world, have found applications in health care and counselling as well as in sports, the armed forces, and corporations, and have provoked debate in religious and other circles.

Holistic thinking has influenced attitudes about medicine, the environment, the family, work, regional planning, and world peace, among others. Ideas frequently associated with the New Age movement include anthroposophical teachings, inner transformation, reincarnation, extraterrestrial life, biofeedback, chanting, alchemy, yoga, transpersonal psychology, shamanism, martial arts, the occult, astrology, psychic healing, extrasensory perception, divination, astral travel, acupuncture, massage, tarot, Zen, mythology, and visualization.

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