Insure
Insurance is a contract in which one party undertakes to indemnify another partys financial loss arising out of events, such as collision, theft, storm, hurricane, inundation, etc. In other words, insurance is a mechanism through which individual risks are transferred to an insurance company, which agrees to pay for the financial loss of the insured.
Insurance companies:
Insurance Companies sell insurance in exchange of a reasonable amount of fee. These are financial intermediaries that collect and invest large amounts of premiums. They offer protection to the investors, provide means for accumulating savings, and allocate funds to the government and other sectors. Insurance companies provide (sell and service) insurance policies, which are legally binding contracts for which the policyholder or owner) pays insurance premiums. According to the insurance contract, insurance companies promise to pay specified sums contingent on the occurrence of future events, such as death or as an automobile accident. Thus, insurance companies are risk bearers. They accept or underwrite the risk in return for an insurance premium.
Investments of insurance companies have been largely in government bonds, mortgages, state and local (municipal) government claims, and corporate bonds. Insurance business consists of spreading risks over time and sharing them between persons and organizations.
The major part of the insurance company underwriting process is deciding which applications for insurance they should accept and which ones they should accept and which ones they should reject, and if they accept, determining how much they should charge for the insurance. This is called the underwriting process. For e.g. an insurance company may not provide life insurance to someone with terminal cancer or automobile insurance to someone with numerous traffic violations. Moreover, in some cases, they may provide different classes of insurance with different premiums. For e.g. the company
may insure but charge a smoker a larger premium for life insurance than a non-smoker; and insure someone with a mediocre driving record, but charge more for automobile insurance than an individual with a better driving record. The underwriting process is critical to an insurance company.
Because insurance companies collect insurance premiums initially and make payments later when (e.g. the insured persons death) or if (e.g. an automobile accident) an insured event occurs, insurance companies maintain the initial premiums collected in an investment portfolio, which generates a return. Thus, insurance companies have two sources of income: the initial underwriting income (the insurance premium) and the investment income, which occurs over time. The investment returns result from the investment of the insurance premiums until the funds are paid out on the policy. The premium is a stable type of revenue. Investment returns may vary considerably with the performance of the financial markets. The payments on the insurance policies are one major expense of the insurance company. These payments vary among the different types of insurance policies and companies. The payments may be very unstable, depending upon the type of insurance. The other major type of expense is the operating expense of the insurance company. This expense tends to be quite stable.
Principles of insurance:
The principles of insurance in respect of occurrence of loss (s) are as follows:
Uncertainty: There should be no definiteness on the timing of the losses.
Relatively predictable: The insurers should be able to set premiums for each insurance in an accurate manner. In case of exceptions, such as a chain-smoker, a diseased person, etc., the insured will have to pay higher premiums.
Macro-level predictability: Insurers should be aware of how much they are required to pay at the time of occurrence of insured-for event.
Significant: The losses should be significant in nature; that means the losses should be such that they are eligible to be indemnified for.
Quantitative: The losses should be quantitative in nature in order to be covered.
Types of insurance:
Following are some important types of insurance:
Automobile Insurance
This insurance provides coverage for accidents of automobiles like car, truck, and other such vehicles. In U.K., automobile insurance is most commonly known as Motor Insurance.
Casualty Insurance
This insurance policy is not restricted to any special category, such as life, property, or death. It provides indemnity against all sorts of accidents.
Credit Insurance
It provides insurance in terms of money either a part or the whole of loan amount, in the event of the borrower becoming disabled, unemployed, or in the event of his death.
Health Insurance
It provides insurance cover for all medical bills of the insured in the event of sickness or accident of the insured. The insurer or the insurance company may be a private organization or a government agency.
Liability Insurance
This is a special type of insurance, which provides insurance coverage to third parties. The third parties include persons other than the principal two parties, who have been affected in a way by the contract between the first two parties.
Life Insurance
This is an agreement whereby one party promises to pay a specific amount of money to another in case of the death of the latter. The insured has to pay a fee to the insurer called premiums.
Locked Funds Insurance
This type of insurance is hybrid in nature; both governments and banks are issuing them. It protects public funds from meddling up by unauthorized parties. The terms under this insurance policy are quite strict. Thus, they are not used regularly, but in extreme cases where the protection of resources is of supreme importance.
Marine Insurance
Marine Insurance as a technique is one of the ancient form of Insurance, providing protection against the perils of seas. It is concerned with the insurance of goods in transit, i.e., Cargo Insurance, the insurance of ships i.e. Hull Insurance, and the insurance of freight at the risk of the carrier.
Professional Indemnity Insurance
This provides insurance coverage for potential negligence claims for professional people, such as Architects, Lawyers, Doctors, Solicitors, Accountants, etc.
Property Insurance
This type of policy insures against property risks in case of fire, theft, and weather damage.
Workers Compensation Insurance
It provides cover for either whole or a part of a orker's wages lost and medical expenses incurred due to an injury occurred in the job premises.
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