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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