Table of Contents
Insurance is an agreement between two parties, the insurer and the insured in which the insurer gives an indemnity to the insured in an event of financial loss, in exchange for a premium. In other words, it is a contract in which policy represents where an individual or an entity receives financial protection against an event of loss from the insurer (insurance company). The insurance company is responsible for pooling the risks of its clients to make payments that are more affordable for the insured.
The insured is the policyholder who undertakes the policy while the insurer is the company that insures him against risks or financial losses. These policies help to reduce the exposure to the risk of financial loss, whether the risk is big or small. These losses usually result from the damage to the insured and his property. Also, these risks arise from liabilities that come about due to damage or injury to a third party.
What Is Insurance?
Insurance is, therefore, a legal agreement that takes place between two parties. So, we can define it as a legal contract where the insurer promises to indemnify (compensate) the insured for financial losses due to his risk exposure in return for the premium which the insured pays to the insurer.
To simplify the definition, the term refers to a risk transfer mechanism where the insured transfers risk to the insurer to get cover for financial loss that may occur due to unforeseen circumstances.
The word premium refers to the amount the policyholder pays for this agreement/contract. Indemnity is the compensation that the insurer gives to the insured in an event of loss or damage. Insurance cover exists for different risk factors, including life and nonlife cover. In general life, it is very vital for one to protect what is important to him.
Life is generally full of risks and uncertainties, we are all exposed to risks in one way or the other. We do not know what will happen in the next moment. This is a major reason for the existence of insurance. To reduce the likelihood of these financial losses or property damage. It is all about risk transfer from one party to the other. Without risks and uncertainties, there will be no insurance in place.
The policies vary among different forms or types of insurance which we will later address in this article.
Components of insurance policy
Premium is the amount the policyholder pays for the insurance policy, that is the price of the policy. It is a periodic payment usually monthly and it is the insurer who determines this premium. Determining this payment depends on the risk profile of the insured (individual, business, property, etc.). This also includes creditworthiness as well.
For example, if a policyholder owns several costly vehicles and also has a history of reckless driving, his premium is likely to be higher. On the other hand, a policyholder who has a history of perfect and careful driving is likely to pay less premium. However, different insurance companies can charge different premiums for similar policies.
Well, premium payment is not only dependent on the risk profile, it is also dependent on the insurer who is charging the payment.
This refers to the maximum amount that the insurer will pay under a particular policy for a covered risk. This maximum amount can be per periods such as annually or during the policy term per loss or injury. It can also be over the life of the policy which is also referred to as the lifetime maximum.
By characteristics, higher policy limits attract higher premiums. Heading to the general life insurance policy, the maximum amount the insurer will pay is the face value. This is the amount the insurer will pay to the insured’s beneficiary upon the death of the insured.
A deductible refers to the specific amount of money an insured must pay out before receiving a claim from the insurer. It serves as an instrument used to discourage large volumes of claims that are small and insignificant.
Deductibles are applicable per policy or per claim depending on the insurer and the type or nature of the policy. Policies with very high deductibles are usually less expensive. This is because of the high out-of-pocket payment that results in small or fewer claims.
In other words, it is the amount the insurer deducts from the claims payment it will make to the insured. It is a way of sharing risk between the insurer and the policyholder. In the insurance context, a deductible is different from that of taxation which the taxpayer subtracts from his gross income before completing a tax form.
In the business setting, deductibles vary across business structures such as corporations and limited liability companies and corporations. Though these business organizations undertake insurance policies to cover financial losses. The insurance deductibles are also applicable to them.
A claim is a formal request which the policyholder makes to the insurance company for indemnity (compensation) over an insured loss or policy event. The insurance company can either validate or deny a claim due to various factors. When the insurer approves a claim, it will issue a payment to the policyholder or an approved party on the policyholder’s behalf.
Insurance claims cover everything ranging from death benefits which relate to life insurance, property, health, automobile, etc. There are cases in which a third party is able to file a claim on behalf of the policyholder. In most cases, it is only those that have their names listed in the policy that is entitled to claims payment.
Filing a claim
Filing a claim means that an insured is making a request to an insurance company to pay a sum of money based on the terms of the policy. The aim of filing a claim is to collect insurance benefits and this activity takes place only in an event of a loss. Claims payment then take place according to the terms of the policy.
Contingency refers to a potential future occurrence of a negative and unfavorable event. these events include accidents, natural disasters, insurgency, or a pandemic.
Features of insurance
Insurance is an instrument to share financial losses that may face an individual, family, or a business on account of an event. These events of loss include the death of a breadwinner to a family (life insurance), perils such as marine, aviation, or damage caused by fire. The insured shares these losses in form of a premium.
Insurance is characterized by the cooperation of a large number of people who agree to share financial loss that arises from an insured risk. A group of persons as such may come together, either voluntarily or via the agents’ solicitation.
An insurer may not be able to compensate for all the losses from his own capital. So, when an insurer underwrites the risks of a large number of persons, it means that he is able to pay for those amounts of losses. Just like every other cooperative device, it is not compulsory for anyone to buy an insurance policy.
Value of risk
The company evaluates the risk before insuring to charge the amount of share of risks, that is the premium. There are different methods of evaluating risks. The insurer charges a higher premium when there is an expectation of more losses. In this case, they calculate the probability of loss at the time of insurance.
Payment at contingency
An insurer makes payment to the insured in an event of loss arising from a certain insured contingency. In other words, if a certain insured contingency occurs, there will be payment for it.
Insurance basically all about uncertainty but the case is exceptional for life insurance. This one is a contract of certainty because the contingency is the death of the insured or the expiry of the term. In such cases, the payment is certain. In the case of other insurance contracts, the contingencies such as fire perils, marine, theft, etc. may or may not occur. If they occur, then there will be payment but if not, there will be no payment for the policyholder.
There are certain types of life policies that the payment may not be certain as a result of a particular contingency within a particular period. Like in the case of term life insurance, payment will take place only when the death of the insured/assured occurs within that term. Also, in a pure endowment, payment takes place when the insured survives at the expiry of the period.
Amount of payment
The amount of payment is highly dependent on the value of the loss that occurred. The loss that occurs must be as a result of an insured risk, if not, there will be no payment of claims. In the case of life insurance, the aim is not to make up for a financial loss suffered. But the insurer promises to pay a fixed amount of money when an event happens.
In the occurrence of an event, the payment is not overdue when the policy is still valid at the time of the occurrence.
A large number of insured persons
For an insurer to be able to spread loss immediately, smoothly, and cheaply, there has to be a large number of insured persons. Though there can be a small number of insured persons in some cases, this has to be limited to a smaller area. With a small number of insured persons, the cost of insurance to each member tends to be higher thereby making it unmarketable.
This implies that for insurance to be cheaper, it is important to insure a large number of persons or properties. This is because the higher the number of insured persons, the less the insurance cost, and the lower the premium will be. This means that for insurance to be successful in its functioning, there should be a large number of persons.
Insurance is not gambling
The service of insurance is indirectly heading towards increasing the community’s productivity through the elimination of worry and increasing initiative. This changes uncertainty to certainty by insuring lives and properties. This is so because the insurer has promised to pay a certain sum of money in an event of loss, damage or death.
From the point of view of family and business, every life possesses an economic value that death may strip off at any time. This makes it necessary to insure against loss of this value just as it is in the case of protecting oneself against property loss. In case insurance is absent, owners of property can at least carry out some form of self-insurance. Well, this does not really possess absolute certainty.
Similarly, in absence of life insurance, saving requires time; but death may occur at any time and the property, and family may remain unprotected. Thus, the family is protected against losses on death and damage with the help of insurance.
From the point of view of a company, life insurance is absolutely non-speculative. This means that no other business operates with greater certainties. The insured’s point of view shows a proposition that insurance is the opposite of gambling. Life is more uncertain than every other thing, therefore, life insurance provides the only sure means of changing that uncertainty to certainty.
When insurance fails, this will amount to gambling. This is because the uncertainty of loss is always threatening. The fact shows that insurance is directly opposite to gambling. In gambling, the person involved is the one exposing himself to the risk of financial loss an insured is always in opposition to risk. He will, therefore, suffer loss if he is not insured. Through insuring life and property, the insured protects himself against the risk of loss. This also means that if he fails to insure his life or property, then he is gambling with his life or property.
Insurance is not charity
Charity involves giving without consideration but it is not possible to carry out an insurance policy without a premium. It provides safety and security to individuals and society though it is a form of business because considering premium, it guarantees the payment for a loss. Insurance is, therefore, a profession because it makes adequate sources available in an event of disasters only by charging a nominal premium for the service provided.
Types of insurance
There are two basic types of insurance with sub-categories under each. The two basic types are life and non-life insurances. Generally, insurance is highly popular as these policies make provision for financial compensation in an event of financial loss. These losses can result from fire, accidents, diseases, fire, natural, and man-made disasters.
A) Life insurance (assurance)
Life insurance is a contract between a policyholder and the insured/assured and the insurer where the insurer promises to pay a sum upon the death of the insured or after a laid down period, in exchange for a premium. In essence, the life policy guarantees that the insurer pays a sum of money to beneficiaries named in the policy in an event of the insured’s death. It can be for a set period of time or upon the death of the policyholder.
This is a contract, legally binding. For this contract to be enforceable, there has to be full disclosure of material facts such as the past and present health condition of the policyholder as well as risky activities. He must pay upfront or regular premium overtime. If either of the parties breaches the contract, it will not be legally binding.
Life insurance falls into three categories namely;
- Whole life
- Term life
Whole life means that the assured receives a cover for the duration of his life as long as he pays premium duly. It is a form of permanent life insurance, that is, it is a lifetime thing. This policy offers a component of savings commonly known as cash value. In this case, the premiums are usually fixed and do not change no matter the market condition. It is also possible to withdraw funds and take out a loan. The death benefit is guaranteed as long as the policyholder pays the premium as required.
In essence, the policy provides lifelong coverage as well as a variety of guarantees. This can be so appealing to a prospective policyholder.
Another name for a term policy is pure life insurance. Here, death benefit payment is guaranteed when the policyholder dies during the term of the policy. If the term expires, the policyholder can renew the policy. He can also choose to convert it to a permanent life coverage/whole life. If the policyholder wishes, he can allow the policy to terminate. In other words, term policies terminate or expire after a specific number of years.
Payment of death benefits takes place only when the assured dies within the stated term in the policy. This means that there is no payout if the policy expires before the death of the assured.
The major factors that determine the premium of term life policies include age, health, and life expectancy. The death or cash benefit here is the face value. With this, if the policyholder wishes to renew the policy, the insurer will need to recalculate the premiums based on his age at the time of renewal.
This policy does not have any value aside from the death benefit which the insurer guarantees. The savings component is absent in this case unlike in the case of whole life policy. Because this policy offers benefits for a restricted time, it is the least costly life policy.
An endowment policy is a policy in which the insurer pays a stated amount to the insurer after a specific period of time as it is in the contract. Also, payment takes place to the beneficiaries when the insured dies within the specified time. It is a life insurance contract that is meant to pay a sump sum after a specific term usually upon its maturity or the death of the policyholder. One of the major benefits of this contract is savings. Typically, these maturities take place between ten, fifteen, or twenty years up to a particular age limit. There are times that this policy pays out in cases of critical illness.
This policy is usually best for individuals who love spending frequently/extravagant spending. That is, the endowment policy is best for a habitual spender. For those who find it very difficult to save for future needs.
B) Non-Life Insurance
Non-life insurance is a policy in which the insurer compensates the insured over losses incurred from a specified financial event. It refers to insurance that does not relate to life. This implies that all general insurances, property, casualty, motor, liability, marine, aviation, fire, are names that fall within this category.
There are many types of non-life insurance policies, we will look at the following;
The non-life policies are not limited to these, there are several others such as burglary and theft, agricultural, liability insurance, etc.
This is a type of policy that covers losses of cargo or damages to ships, or cargo vessels in which the transfer of goods takes place from one point of origin to its final destination. This policy provides a refuge for shipping companies and courier services. This is because it helps in protecting them from potential losses that are costly, that take place in the course of transporting goods by water.
It is certain that laws and safety regulations, as well as transporters, cannot control natural uncertainties that may disrupt cargo or vessels. Some of these factors include weather hazards, cross-border conflicts, etc. These factors can cause significant financial hardship for ship owners. So, the aim of marine cover is to come to the rescue of shipping corporations and transporters, protecting their interests as well as providing them with insurance coverage necessary to give them defense against possible losses.
Under this policy, transporters can choose coverage options that best fit into their specific trade. These coverage requirements differ, this makes it possible to choose a customized insurance plan. Also, various policies are available to make coverage available in accordance with the size of the ship as well as the routes taken.
This is a policy that a traveler purchases in order to protect him from financial risks and losses bound to occur while traveling. These losses can result from armed robbery, last-minute trip cancellation, a delayed suitcase, etc. This policy is beneficial not only in the aspect of financial protection but also in assistance services. This assistance can also go a long way in saving the lives of travelers. In other words, travel insurance provides coverage against costs and losses that are associated with traveling.
There are travel policies that also cover damage to personal properties, rented equipment, and even ransom requests.
Usually, the main categories of these policies include trip interruption or cancellation coverage, accidental death coverage, medical coverage, flight accident coverage, etc. This can as well include services such as replacement of lost passports, cash wire assistance, rebooking canceled flights, etc. These emergency services can be 24/7.
This is an insurance policy that covers the insured against medical expenses that are bound to arise as a result of illness. This relates to costs of hospitalization, drugs, or doctor consultation fees. In other words, this policy pays for medical expenses such as surgery, drug prescription, dental expenses (in some cases), injury, etc. This usually forms part of the employer benefit packages as a way of enticing quality employees. Usually, the employer partially covers the premiums but often deducts them from the employees’ salaries.
Health insurance premium costs are usually deductible to the payer and the benefits are free of taxes. There are certain exceptions for the employees of S Corporations.
What is a health insurance premium?
A health insurance premium is an amount a policyholder pays health insurance periodically. this periodic payment is usually on monthly basis.
Car insurance is a type of policy in which the insurer promises to compensate the insured for a loss that occurs in an auto crash. In other words, it is the protection against financial risks that are associated with owning a car. This policy covers the cost of damage to the insured’s vehicle and the other driver’s vehicle. Also, it covers any medical bill that may result from a car accident, depending on the situation.
If a policyholder has never had an accident, then it is possible that he will never file a claim. Though there is always a likelihood that one will get involved in at least one accident in a lifetime.
Driving without an auto policy tends to amount to a greater financial burden, fines inclusive. With this policy, if an individual as a passenger or the other driver sustains injury in the accident, there will be a cover over the expenses. Also, the policy will help guard against any form of litigation that is bound to result from the accident.
Auto insurance does not just protect against accidents, but also against theft of the vehicle, vandalism, or natural disasters. Here, individual circumstances are factors that determine the cost of this policy.
It is important to compare several quotes and coverages to get the right auto insurance policy. Also, a prospective insured should check periodically to see if he is qualified for lower rates based on age, driving history, and residential area.
Difference between life and non-life insurance
Life insurance policy makes provision for a lump sum assured at the time of maturity or in an event of the death of the insured. Non-life policies, on the other hand, provide financial protection to the insured in an event of health uncertainties or losses that result from damage to an asset.
The nature of a life insurance policy is acknowledgeable as an investment or savings, not a contract of indemnity. General insurance on the other hand is a contract of indemnity. The insured and other people insured under the policy are entitled to the benefits of the insurance coverage.
The insurer pays the policyholder the sum assured when the policy reaches a state of maturity or at his death to beneficiaries. On the other hand, in the general policy, the claim is processed in an event of the damage or financial loss the policyholder suffers.
While the cost of the policy depends on the amount of sum assured which the insurer will offer to the policyholder or beneficiaries, in general insurance, the cost of a policy is dependent on the value of the insured assets.
A life insurance policy is usually longer than a general policy.
Importance of insurance
Insurance is the most effective tool for risk management thereby protecting both individuals and businesses from financial risks that may result from different contingencies. Though the insurer cannot compensate for emotional and psychological loss, it can compensate for financial losses. Though uncertainties exist in life which one cannot mitigate, insurance certainly helps to transfer financial risks that associate with the same.
We shall look at the benefits of insurance in the following aspects;
- Health security
- Peace of mind
- Promotion of risk control
- Promotes economic growth
- Distribution of risk
- Easy access to a loan
- Inculcates savings habit
- Provides tax benefit
Health uncertainties form part of our daily lives. This helps to keep in mind the rising cost of healthcare and the increasing rate of disease outbreaks. It is necessary to have financial support to protect oneself against health uncertainties. Adequate health insurance coverage help to protect one from a financial crisis in an event of health/medical emergencies.
Peace of mind
Insurance provides protection against different uncertainties that can place an individual or family in a financial crisis. Because of this, it provides peace of mind. Covering against uncertainties relating to human lives and businesses provides a sense of security. Life insurance for example provides peace of mind because there is a guarantee of financial stability. In another sense, the family will remain intact in the absence of the assured. For health insurance, there is this sense of security that there is no need for one to use up all his savings in an event of medical emergencies.
Promotion of risk control
Because the contract works on the mechanism of risk transfer, it helps in promoting risk control. Aside from the payment of premium, another condition that will help to facilitate claims payment is precautionary measures. On part of the insured, there is a need to take be cautious over risky behaviors and activities.
For example, an individual decides to go for a fire insurance policy, it is necessary to have every tool necessary to curb fire incidents such as fire extinguishers. Claims payment may not take place if the insured is ignorant about the precautions. Also, you cannot intentionally set your house ablaze because you have a fire insurance policy. There will be no indemnity if such a thing results.
As a policyholder transfers his risk to the insurer, he also has a role to play in curtailing those risks in the policy. Therefore, insurance facilitates risk control.
Promotes economic growth
Insurance contributes to the overall growth and development of an economy as they tend to invest funds in different projects like infrastructural development. It provides employment opportunities to people which contributes greatly to a nation’s GDP. Other ways through which it contributes to economic growth are getting Foreign Direct Investment, tax payment on profits earned, and capital market investment, etc.
Distribution of risk
It helps to spread risks across different individuals and organizations rather than concentrating these risks on a single hand. Through this, the burden of financial loss becomes lighter on entities and individuals. There is no cause to worry so much about financial losses that may result from various contingencies because you have spread those risks.
Easy access to a loan
Financial institutions as well as other lenders offer loan facilities against insurance policies. An individual with a cover with regard to this can get a loan easily from the lender. In other words, an insurance cover helps one to have easy access to loan facilities.
Inculcates savings habit
There are several products of life insurance that come with investment alongside protection benefits. Such products help to inculcate a habit of regular savings among individuals. Especially plans like the endowment insurance plan, help in facilitating the achievements of long-term financial goals. Also, pension plans help in receiving a regular flow of income in the period of old age.
Provides tax benefit
Policyholders are entitled to tax benefits for premiums paid which is highly dependent on the type of insurance product. For example, when a policyholder pays a life policy premium, he qualifies for a tax deduction. This also varies across the government laws of countries.
This has to do with the intermediation between the insurer and the insured. This agency involves the authorization of an individual or an entity to sell the products of the insurer in exchange for compensation.
The insurance agency comprises the following;
a) Insurance agent
An insurance agent is an individual or an entity authorized to sell the insurer’s products in exchange for compensation or commission. In other words, it refers to a professional who specializes in selling the products of the insurer to customers for a commission. An agent helps clients to select the right or suitable policy to buy but is a representation of the insurer in the transaction. There are two types of agents, captive agents, and independent agents.
The law of the state regulates these agents, that is the state in which they operate. Independent agents offer products from different insurers while captive or exclusive agents only sell the products of a single insurer.
Well, there is no restriction for an agent to work with a specific insurance company. They are free to sell policies of as many insurers as possible, as they wish. They sell these policies to individuals and corporate bodies depending on their needs. Insurance companies are big just like their brokerage firms.
Though the insurance business is beautiful, it can also become a loss when an individual or a corporate body is ignorant with regard to their wealth investment. This policy requires a lot of information and guidance for the policyholder. The role of an agent steps into situations like this to help provide relevant information and guidance. Agents have gained wide recognition so no individual or business will wish to lose their money in the process of saving it.
Roles of an insurance agent
The agent performs the following roles;
Risk assessment and evaluation
They assist clients/customers in assessing the risks that are peculiar to their businesses as well as their personal lives. They guide clients, giving them the necessary knowledge in choosing the best insurance coverage their businesses must-have. Every entity has its own primary risk, these agents are in the best position to assess and evaluate such risks. For example, the primary risk exposure of an oil and gas company is fire. Piracy can be another risk factor.
It can be very confusing to understand insurance policies which their many numbers. Agents in this respect help in breaking down the premiums and limitations of each policy. They give clients clarity on the renewal rate of their coverage, the best coverage that suits their financial needs, etc. It is the role of an agent to simplify complicated policies to enable even the uneducated to understand.
Reviewing the insured’s coverage
Usually, insurance coverage is not a one-off payment. It requires periodic renewal on the basis of the signed contract within the policy. Agents help in giving policyholders a review of the utilization of their project and possible ways to improve it.
b) Insurance broker/brokerage
These are independent insurance specialists who are legal representatives of the buyers of the insurer’s products. In other words, a broker is a professional who represents consumers or prospective policyholders in their search for the best policy suitable for their needs.
Like the agents, the brokers assist clients in identifying suitable insurance plans for their specific needs. They meet with small business clients to assess the situation of the company. They try to understand the different risk exposures that the company faces. Also, brokers recommend insurance products that best fit the needs of the business. They play a significant role in selecting insurance products that protect the financial interests of the client.
In essence, the brokers work closely with the clients to make research on coverage, terms, conditions, and price of policies. They then make recommendations on the insurance policy that best fits the bills.
The major types of brokers include retail brokers, wholesale brokers, and surplus line brokers.
Retail brokers work directly with buyers to assist in obtaining an insurance policy. They can do that either directly from the company or wholesale brokers if the risk exposure is more complicated and requires an insurance product that is more specialized.
Wholesale brokers make provision of insurance products to retail brokers. These ones do not have direct contact with the end buyer (individuals, families, or business entities). They help in providing specialized knowledge and expertise on insuring more complex risks.
Surplus line brokers are responsible for negotiating coverage for excess and surplus (E&S) lines insurers. By implication, they provide coverage for those financial risks that standard insurers are unwilling to cover. The wholesale brokers work alongside the surplus line brokers.
The difference between agents and brokers
Brokers and agents are all intermediaries between policyholders and insurers. they are both authorized individuals/entities to sell insurance policies. They are governed by state rules and regulations which the state enforces.
The key difference between these two intermediaries lies in who they represent. This means that their services will be dependent on the area in which their interests align.
While agents represent the insurers, brokers represent the insureds. Agents work for the insurers while brokers work in favor of those who buy the products of the insurers.
Usually, agents have the license to complete insurance sales, that is to bind the coverage. Brokers on the other hand cannot play this role.
Agents get appointments to represent at least one insurer, brokers do not. This appointment possesses a contractual value, an agent signs it. This contract states the products the agent can sell and the commission the agent will receive. On the other hand, brokers can request price quotes from multiple insurers. Here, when consumers are ready to buy these products, it is mandatory for them to obtain a binder directly from the agent.
The importance of insurance agencies and companies
A single insurer (carrier) can only offer its own products irrespective of the type of policy. An agency on the other hand can offer insurance products/coverage from different carriers, not limited to a single insurer. This provides a forum for agents to search for the best coverage at the lowest possible price.
These agencies are, therefore, important in the following ways;
- Establishing a relationship
- Full service
Establishing a relationship
The insurance agent knows the goals and needs of the policyholder. As time moves on, they select and manage coverages in ways that will keep the premiums as low as possible in the course of providing the types and amounts of coverages needed. With this, intermediaries help in establishing a relationship between the insurer and the buyers.
Both independent and captive/tied agents are accountable to the insurer and the policyholder at different intervals. They have a primary duty to both parties. They must not go beyond the constraints of their agreement or contract with the carriers/insurers. Well, it is a necessity for them to place more priority on the financial interests of the policyholder than that of the insurer. Though this will not be the case when a policyholder purchases through a direct insurer.
They offer full service in the sense that most policyholders/customers get every coverage they need from their agent. In other words, they serve their clients.
This term refers to a single entity that is responsible for writing insurance policies, paying claims, and bearing all the risks that have to do with the policy written. These entities also refer to the insurers are the ones who sell insurance products to the buyers. Consequently, the government heavily regulates these companies to make sure that they have the financial capacity to cover these risks.
Types of Insurance Companies
This company has the license to operate and sell specific lines of insurance policy in a particular state. Another name for this type of carrier is admitted carriers. The state board of insurance regulates the rate charges for standard line carriers. That is the state in which these insurers operate. This means that they are subject to the laws and regulations of the states where they have the license to operate. It is mandatory for a standard lines carrier to contribute to the state guarantee fund. The aim of this fund is to pay claims presented in case the insurance company becomes insolvent.
The excess lines carrier also refers to surplus lines. These companies mainly insure specialty risks which include high-risk vehicle insurance. They also insure high-risk individuals that are usually ineligible for coverage from standard lines carriers. The reason why high-risk individuals are not eligible to get coverage from standard lines is the underwriting guidelines and restrictions. For example, a driver with many speeding tickets or other traffic violations, or a new business or company that possesses no prior coverage.
In essence, the excess lines insurer provides insurance coverage over those risks that are too high for a regular insurer to take on. Companies, as well as individuals, can use this coverage. This is quite different from general insurance in the sense that the policy can be bought from an insurer that does not have a license in the state of the insured. But it has to get a license in the state where it base.
This defines an insurance company that its insureds wholly own and control. The primary objective of this company is to insure the risks of its owners. It is the insureds that benefit from the underwriting profits of the captives insurer. The owners of captives choose to risk their own capital to create their own insurance company. Also, they do not work within the commercial insurance marketplace. They work outside of it so that they can achieve their risk financing objectives. in other words, the term refers to a situation in which a company provides insurance cover for itself. That is, it typically insures the risks of a particular industry or group of individuals.
This is similar to the captive insurer. The two terms look similar in the sense that the policyholders of this company also exercise control over the company. In this case, the policyholder may be requested to vote on matters that require his actions. In essence, the policyholder will be presented with a proxy, and the board of directors running the company will advise him on how to exercise these votes.
The policyholder’s ownership status ceases as soon as the insurance ceases. One significant difference between the captives is that the policyholders do not invest any asset or capital in the company. The policyholders do not actively partake in running this company. The owners of mutual companies (policyholders), we consider as the shareholders. This means that they can receive dividends and may not receive any penalty from an increase in premium due to losses.
This refers to an insurer who sells directly to customers without making use of any intermediary, that is the agents and brokers. These direct insurers have local field offices with the representatives of the company. Though conduct majority of businesses online or via phone calls. In this case, the policyholder has to directly deal with the insurer for quoting and purchasing a policy as well as effecting necessary changes in the policy. This direct contact between the policyholders and the carriers is a result of the fact that there are no intermediaries involved.
The factor that determines the use of direct insurance is whether the policyholder feels comfortable dealing directly with the company or not. If the policyholder prefers the services of an agent, then there will be no direct insurance.
This is an insurer that is licensed in the state where it bases and operates there. It can gain a license to operate in other states but those states will consider it an alien insurer.
This is a company that is incorporated based on the laws of another company. For instance, an insurance company incorporated as a US company but operates in France. In this case, France will consider it an alien insurer/carrier.
This also refers to as insurance for insurers. We can also call it stop-loss insurance where insurers transfer part of their risks to other insurers or larger insurers. This is to reduce the tendency of large financial obligation which results from a claim. The reinsurer here is the company that accepts a portion of the initial insurer’s risk or potential obligation. it also receives part of the initial insurer’s premium.
Characteristics of insurance companies (insurers)
The activity of the insurers focuses on wealth accumulation through the contribution of the insured (premium). They guarantee financial support in an event of financial loss. These insurers generate their profits from these premiums looking at the fact that not all the insured risks eventually take place. This facilitates wealth accumulation.
They follow the rule of mutuality, seek solidarity between a group that is subject to risks. In essence, they create a heritage that is capable of coping with risks. We consider the unfavorable effect of risks as a whole diminished. This is because, for the carrier, he compensates for the individual risks since few policyholders suffer those risks. This is in comparison to the many insureds who contribute to the payment of coverage in form of a premium.
Depending on the legal constitution of each state, insurance companies can be of different types as we have seen above. All share the essential attributes for marketing insurance.
Their operations can be either single or versatile. That is, they can operate in either one or multiple branches and areas or policies such as automobile, fire, third-party liability, etc. Their operations keep going as long as they comply with the state’s legislation.
It is mandatory for an insurer to have sufficient financial resources and be solvent to operate. With this, the legislation places so many restrictions on them. Without adequate financial resources, a company will be insolvent and will not be effective in its operations. It will dissolve after some time.
Insurers are constantly under state regulations. This is to allow the highest level of trust to reflect between the insureds and insurers thereby placing them under protection and vigilance. With the presence of legal regulations, an ordinary person cannot carry out the activities of insurers. The law requires permanence and stability in the insurance sector.
Insurers are after protecting their policyholders from financial loss, they reduce the adverse effects of risks and uncertainties. They protect the assets and properties of individuals and businesses and give them financial support in an event of financial misfortunes.
Basic principles of insurance
These basic principles entail the principles the parties involved in the insurance contract must follow. They are;
- Insurable interest
- Utmost good faith
- Proximate cause
- Loss minimization
Insurable interest simply means the right to insure arising from a financial relationship between the insurer and the insured. This relationship possesses legal recognition. This explains that the subject matter of insurance must be able to provide some financial gain for the policyholder. If this subject matter loses to damage, theft, fire, etc, it must result in a financial loss. That is, an individual or business has an insurable interest in the subject matter when damage or loss amounts to a financial loss.
To have an insurable interest, one needs to buy an insurance policy that will protect himself or his property. The policy will then reduce the risk of loss in an event of damage or loss. The subject matter must be insurable.
This principle is an important factor that facilitates the issuance of a policy that makes the event and entity legal. This further explains that you cannot enter into a policy to cover yourself if you are not actually subject to the risk of financial loss.
Utmost good faith
This principle, also known as uberrimae fidei states that both parties involved in the contract should act in good faith towards each other. That is, both parties (insurer and insured) must give clear and concise information with regard to the contract’s terms and conditions. In essence, this principle is all about the disclosure of material facts about the subject matter of insurance.
The insurer should/must clearly explain everything clearly about the insured item, whether requested or not. On the other hand, the policyholder must provide accurate information, clear and concise about the subject matter. That is objects or interests of the insured. This principle is basic and primary because the nature of insurance is to provide a certain level of security to the life of the insured. The insurer must also be watchful in case anyone wants to exercise fraudulent practices.
If the insurer falsifies or misrepresents information thereby causing the insured a loss, then it is liable for the area of loss. If the insured misrepresents any information with regard to the subject matter, then the insurer’s liability becomes void. The insured should provide transparent information relating to personal history, risky behaviors, and other exposure units.
Proximate cause is the active and efficient cause of loss. Meaning the chain of events that lead to a loss. More than one incident can result in a loss of insured property, in succession to each other. That is, one can insure a property against some causes of a loss, but not all causes. They should be able to find out the nearest cause. If the proximate cause is the one the parties insured against, then the insurer must indemnify the insured. On the other hand, if the proximate cause is not in the policy, then the insurer is not liable to pay compensation.
When buying a policy, an insured is most likely to go through some processes. This is where they will select the risks to cover or not to cover. In an event of loss, the insurer has to investigate the proximate cause before making any validation.
This can cause controversy especially in cases whereby a policyholder suffers a loss he thought was covered. This happens after the insurer says NO to a claim, stating that there was no coverage for the risk. Insurers also want to ensure that they protect themselves. But there are instances in which they will use this to get out of a liability for a situation. This may result in disputes which may result in some forms of litigation.
This is a situation whereby the insurer restores the insured back to his initial financial position before the event of a loss. It is the financial compensation to place the insured back to his financial state before the loss. The insurer guarantees this based on the contract.
In essence, the insurer promises to compensate the insured based on the amount they agreed upon in the contract. This is the aspect of the contract that matters the most to the policyholder. This aspect states that the policyholder has the right to receive financial compensation/indemnity for the incurred loss. The amount of indemnity is directly proportional to the amount of loss. The insurer can pay up to the loss amount or the insured amount which the collectively agreed upon in the contract.
For instance, a policyholder insures his vehicle for $20,000 and the damage that took place is $5,000. the insured will receive an indemnity of $5,000 which is not the full amount.
This is a principle that describes the right of insurers to legally go after third parties that caused the insured to suffer financial loss. This takes place to recover the amount of claim which the insurer pays to the insured for that loss.
In most cases relating to this principle, the insurer directly pays claims to the insured. It then seeks reimbursement from the third party’s insurer. Subrogation is common in motor insurance but also present in property, casualty, and healthcare policy claims.
The insurer can only benefit from this principle by replacing the money it paid to its policyholder as well as the costs of acquiring the money.
This principle applies to the portion of loss each insurer pays to the insured. This happens in cases in which two or more insurers cover a single loss. It also means the portion of a premium an insured pays. Under coinsurance, the term means the portion of loss an insurer pays.
The insurer has the right to invite other insurers to equally bear financial liability to the insured. Though they may not have the same obligations to the insured in partaking in providing the indemnity.
In essence, the principle of contribution states that each policy one has on the same subject matter pays its own portion of a loss which the policyholder incurs. This is an extension of the principle of indemnity. It allows all insurance coverage to have a proportional or percentage responsibility on the same subject matter. That is, the principle holds two or more insurers liable for a covered loss. The insurers, therefore have to participate in the payment for that loss. After an insurer pays its own share of the loss, it may be entitled to equitable contribution.
The insured has the right to recover part of the payment from another insurer whose policy is also applicable. Many policies state the formula under which multiple insurers will carry out their contribution. There are two standard methods under this principle, contribution by limits and contribution by equal shares.
The principle states that the insured has the responsibility to take all precautionary measures to minimize the loss on the insured property. This means that insurance contracts should not be all about a giveaway whenever an event of loss takes place. There is a responsibility on part of the insured to take every possible measure to minimize the loss on the property. This principle possesses some debates. This requires the assistance of a lawyer when the insured feels that an unfair judgment had taken place.
Examples of insurance
For example, a thirty-five-year-old man wishes to protect his family from the unfavorable event of his death. Looking at the fact that his death will result in his family suffering from financial loss, he buys a 10-year term insurance policy at $500,000. He pays a monthly premium of $50. If this man (policyholder) dies within a 10-year term, the insurer will pay his beneficiary (family) $500,000. But if he dies after he has turned forty-five, it means he died when the policy has expired. His beneficiary will not receive any insurance benefit. If he wishes to renew it, then he will pay a higher premium than that of the initial policy on the basis of his age.
If in this policy, the policyholder is diagnosed with a terminal disease, he may not be eligible to renew his policy at expiration. Though there are policies that offer guaranteed insurability, such can make the policy cost more.
If it was a whole life policy, his sum assured will be $500,000 and the policy will still remain valid. When he dies, the beneficiary will file a claim and there will be claims payment.
A policyholder insures his vehicle for $20,000 and the damage that took place is $5,000. the insured will receive an indemnity of $5,000 which is not the full amount.
If for instance, he bought a fire policy for his vehicle for $20,000 and fire happens to consume the entire vehicle, he will receive an indemnity of $20,000.
Before they price the policy, they will check the financial value of the vehicle and evaluate its risk exposure.
Health insurance marketplace
Just as the general insurance marketplace, also known as the health insurance exchange, the website in which individuals have access to browse as well as make inquiries on the different healthcare plans that are available under the Affordable Care Act. People commonly know the Affordable Care act as Obamacare.
On this website, people compare different health insurance and healthcare plans and purchase health ins. policy. There are other states such as California that make provision of their own marketplace. Individuals can use the federal marketplace if their state is not offering its own marketplace.
That is, a marketplace is a place where people who do not have health insurance can access information about the policy. In this platform, they can find options for different policies such as permanent disability, mental healthcare, temporary disability, etc., and buy health policies. It is a service that enables individuals to get enrolment into the health insurance policy.
“Getting insurance is YOUR responsibility to your family and loved ones. You may hate it but it is your responsibility”.
“If a child, a spouse, a life partner, or a parent depends on you and your income, you need life insurance”.
Sri Sathya Sai Baba
“The grace of God is like insurance. It will help you in your time of need without any limit”.
“When you’re young, fit, and full of drive, it’s easy to think that “it will never happen to me.” But this is the myth of invincibility”.
We live in an unpredictable world these days. Thus, there are many legitimate reasons to prepare yourself for those unannounced curveballs.
“Nothing is more important than your life and your ability to make a living. So it makes good sense to insure your greatest asset – you!”
“Savings alone are not enough to achieve financial freedom; insuring your assets with general insurance policies is equally important”.
“No matter how much you are earning or how much you have saved; your financial position can be dented by an unexpected event in a moment”.
“When you have insurance you know that you are secured against any unforeseen events in life, and this gives you complete peace of mind”.
“As an athlete, I understood the value of my health insurance. I knew that in my profession,injuries were common and could happen at any time”.
“Even families with health insurance are quite vulnerable to a severe economic reversal if someone gets sick”.
“It is not good not to have health insurance; that leaves the family very vulnerable”.
“Without health insurance, getting sick or injured could mean going bankrupt, going without needed care, or even dying needlessly”.
Isaac Ike Barinholtz
“I’m a big crier in general. The right life insurance commercial will take me out for a couple of days”.
“Fun is like life insurance; the older you get, the more it costs”.
“I don’t want to tell you how much insurance I carry with the Prudential, but all I can say is: when I go, they go too”.
“If I bought groceries the way I buy health insurance, I’d eat a lot better – and so would my dog”.
I called an insurance company to get a quote. They gave me one of Oscar Wilde‘s best.
“There are worse things in life than death. Have you ever spent an evening with an insurance salesman?”
“It’s very easy for trusted companies to mislead naive customers, and life insurance companies are trusted”.
Had I been injured on the freeway and not in combat, it is likely that I would be bankrupt even though I had medical insurance through my civilian employer.
There should be no private health insurance companies operating for profit.
“Health insurance should be a given for every citizen”.
“I reject the insurance model. I think we should have a free-market approach to healthcare”.
“Medical professionals, not insurance company bureaucrats, should be making health care decisions”.
“We know that 10 million more people will lose insurance in the next 10 years if we don’t act”.
“Insurance brokers make way too much money for the value they provide”.
“Insurance companies as they exist today are going to be eliminated”.
Frequently asked questions
What do you mean by Insurance?
Insurance is an agreement between two parties, the insurer and the insured in which the insurer gives an indemnity to the insured in an event of financial loss, in exchange for a premium. In other words, it is a contract in which policy represents where an individual or an entity receives financial protection against an event of loss from the insurer (insurance company). The insurance company is responsible for pooling the risks of its clients to make payments that are more affordable for the insured. Based on the contract, the insurer promises to provide financial compensation for the insured.
In essence, insurance is a legal agreement that takes place between two parties. So, we can define it as a legal contract where the insurer promises to indemnify (compensate) the insured for financial losses due to his risk exposure in return for the premium which the insured pays to the insurer. In simple terms, it is a risk transfer mechanism where the insured transfers risk to the insurer to get cover for financial loss that may occur due to unforeseen circumstances.
What are the 4 types of insurance?
Basically, there are two (2) types of insurance, life and nonlife, with sub-categories under each.
Life insurance, also called life assurance is a contract between a policyholder and the insured/assured and the insurer where the insurer promises to pay a sum upon the death of the insured or after a laid down period, in exchange for a premium. In essence, the life policy guarantees that the insurer pays a sum of money to beneficiaries named in the policy in an event of the insured’s death. It can be for a set period of time or upon the death of the policyholder. Life insurance falls into three categories namely Whole Life, Term life, and Endowment.
The whole life is a lifetime cover, where the assured is covered for the duration of his life as long as he pays his premium duly. It is for a lifetime, a permanent insurance policy. The policy seizes from being in place when the policyholder dies. The contract of a term policy is valid for a particular period of time. A policyholder can renew this policy when it expires before death. For instance, a term policy can last for 3 years. If the policyholder dies before 3 years elapse, then there will be claims payment. If 3 years elapse while the policyholder is still alive, then he can either renew the policy or allow it to terminate.
The second category which is non-life insurance is a policy in which the insurer compensates the insured over losses incurred from a specified financial event. It refers to insurance that does not relate to life. This implies that all general insurances, property, casualty, motor, liability, marine, aviation, fire, are names that fall within this category.
How does insurance work?
Insurance is a risk transfer mechanism where the insured transfers risk to the insurer. This is to cover for financial losses that may occur as a result of unforeseen events. It is a legal agreement that takes place between two parties. In the contract, the insurer promises to indemnify the insured if the insured suffers loss. For this contract to be binding, the insured has to pay the premium duly.
For the insurance to charge a premium, it uses probability and the large numbers law to determine the charge of the premium. The rate has to be sufficient for the company to pay future claims and make a reasonable profit.
Insurers market their products in different ways, either directly or through agents. The price they charge is subject to government regulations.