In some sense we can say that insurance appears simultaneously with the appearance of human society. We know of two types of economies in human societies: money economies (with markets, money, financial instruments and so on) and non-money or natural economies (without money, markets, financial instruments and so on). The second type is a more ancient form than the first. In such an economy and community, we can see insurance in the form of people helping each other. For example, if a house burns down, the members of the community help build a new one. Should the same thing happen to one's neighbour, the other neighbours must help. Otherwise, neighbours will not receive help in the future. This type of insurance has survived to the present day in some countries where modern money economy with its financial instruments is not widespread (for example countries in the territory of the former Soviet Union).
Turning to insurance in the modern sense (i.e., insurance in a modern money economy, in which insurance is part of the financial sphere), early methods of transferring or distributing risk were practiced by Chinese and Babylonian traders as long ago as the 3rd and 2nd millennia BC, respectively. Chinese merchants travelling treacherous river rapids would redistribute their wares across many vessels to limit the loss due to any single vessel's capsizing. The Babylonians developed a system which was recorded in the famous Code of Hammurabi , c. 1750 BC, and practiced by early Mediterranean sailing merchants . If a merchant received a loan to fund his shipment, he would pay the lender an additional sum in exchange for the lender's guarantee to cancel the loan should the shipment be stolen.
Achaemenian monarchs of Iran were the first to insure their people and made it official by registering the insuring process in governmental notary offices. The insurance tradition was performed each year in Norouz (beginning of the Iranian New Year); the heads of different ethnic groups as well as others willing to take part, presented gifts to the monarch. The most important gift was presented during a special ceremony. When a gift was worth more than 10,000 Derrik (Achaemenian gold coin) the issue was registered in a special office. This was advantageous to those who presented such special gifts. For others, the presents were fairly assessed by the confidants of the court. Then the assessment was registered in special offices.
The purpose of registering was that whenever the person who presented the gift registered by the court was in trouble, the monarch and the court would help him. Jahez, a historian and writer, writes in one of his books on ancient Iran: "[W]henever the owner of the present is in trouble or wants to construct a building, set up a feast, have his children married, etc. the one in charge of this in the court would check the registration. If the registered amount exceeded 10,000 Derrik, he or she would receive an amount of twice as much."
A thousand years later, the inhabitants of Rhodes invented the concept of the ' general average '. Merchants whose goods were being shipped together would pay a proportionally divided premium which would be used to reimburse any merchant whose goods were jettisoned during storm or sinkage.
The Greeks and Romans introduced the origins of health and life insurance c. 600 AD when they organized guilds called "benevolent societies" which cared for the families and paid funeral expenses of members upon death . Guilds in the Middle Ages served a similar purpose. The Talmud deals with several aspects of insuring goods . Before insurance was established in the late 17th century, "friendly societies" existed in England, in which people donated amounts of money to a general sum that could be used for emergencies.
Separate insurance contracts (i.e., insurance policies not bundled with loans or other kinds of contracts) were invented in Genoa in the 14th century, as were insurance pools backed by pledges of landed estates. These new insurance contracts allowed insurance to be separated from investment, a separation of roles that first proved useful in marine insurance. Insurance became far more sophisticated in post- Renaissance Europe , and specialized varieties developed.
Toward the end of the seventeenth century, London's growing importance as a centre for trade increased demand for marine insurance. In the late 1680s, Mr. Edward Lloyd opened a coffee house that became a popular haunt of ship owners, merchants, and ships' captains, and thereby a reliable source of the latest shipping news. It became the meeting place for parties wishing to insure cargoes and ships, and those willing to underwrite such ventures. Today, Lloyd's of London remains the leading market (note that it is not an insurance company) for marine and other specialist types of insurance, but it works rather differently than the more familiar kinds of insurance.
Insurance as we know it today can be traced to the Great Fire of London , which in 1666 devoured 13,200 houses. In the aftermath of this disaster, Nicholas Barbon opened an office to insure buildings. In 1680, he established England's first fire insurance company, "The Fire Office," to insure brick and frame homes.
The first insurance company in the United States underwrote fire insurance and was formed in Charles Town (modern-day Charleston ), South Carolina , in 1732. Benjamin Franklin helped to popularize and make standard the practice of insurance, particularly against fire in the form of perpetual insurance . In 1752, he founded the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire . Franklin's company was the first to make contributions toward fire prevention. Not only did his company warn against certain fire hazards, it refused to insure certain buildings where the risk of fire was too great, such as all wooden houses. In the United States, regulation of the insurance industry is highly Balkanized , with primary responsibility assumed by individual state insurance departments. Whereas insurance markets have become centralized nationally and internationally, state insurance commissioners operate individually, though at times in concert through a national insurance commissioners' organization . In recent years, some have called for a dual state and federal regulatory system (commonly referred to as the Optional Federal Charter (OFC)) for insurance similar to that which oversees state banks and national banks.
Insurance companies
Insurance companies may be classified into two groups:
- Life insurance companies, which sell life insurance, annuities and pensions products.
- Non-life , General , or Property/Casualty insurance companies, which sell other types of insurance.
General insurance companies can be further divided into these sub categories.
- Standard Lines
- Excess Lines
In most countries, life and non-life insurers are subject to different regulatory regimes and different tax and accounting rules. The main reason for the distinction between the two types of company is that life, annuity, and pension business is very long-term in nature — coverage for life assurance or a pension can cover risks over many decades . By contrast, non-life insurance cover usually covers a shorter period, such as one year.
In the United States, standard line insurance companies are your "main stream" insurers. These are the companies that typically insure your auto, home or business. They use pattern or "cookie-cutter" policies without variation from one person to the next. They usually have lower premiums than excess lines and can sell directly to individuals. They are regulated by state laws that can restrict the amount they can charge for insurance policies.
Excess line insurance companies (aka Excess and Surplus) typically insure risks not covered by the standard lines market. They are broadly referred as being all insurance placed with non-admitted insurers. Non-admitted insurers are not licensed in the states where the risks are located. These companies have more flexibility and can react faster than standard insurance companies because they are not required to file rates and forms as do the "admitted" carriers do. However, they still have substantial regulatory requirements placed upon them. State laws generally require insurance placed with surplus line agents and brokers to not be available through standard licensed insurers.
Insurance companies are generally classified as either mutual or stock companies. This is more of a traditional distinction as true mutual companies are becoming rare. Mutual companies are owned by the policyholders, while stockholders (who may or may not own policies) own stock insurance companies. Other possible forms for an insurance company include reciprocals, in which policyholders 'reciprocate' in sharing risks, and Lloyds organizations.
Insurance companies are rated by various agencies such as A. M. Best . The ratings include the company's financial strength, which measures its ability to pay claims. It also rates financial instruments issued by the insurance company, such as bonds, notes, and securitization products.
Reinsurance companies are insurance companies that sell policies to other insurance companies, allowing them to reduce their risks and protect themselves from very large losses. The reinsurance market is dominated by a few very large companies, with huge reserves. A reinsurer may also be a direct writer of insurance risks as well.
Captive insurance companies may be defined as limited-purpose insurance companies established with the specific objective of financing risks emanating from their parent group or groups. This definition can sometimes be extended to include some of the risks of the parent company's customers. In short, it is an in-house self-insurance vehicle. Captives may take the form of a "pure" entity (which is a 100 percent subsidiary of the self-insured parent company); of a "mutual" captive (which insures the collective risks of members of an industry); and of an "association" captive (which self-insures individual risks of the members of a professional, commercial or industrial association). Captives represent commercial, economic and tax advantages to their sponsors because of the reductions in costs they help create and for the ease of insurance risk management and the flexibility for cash flows they generate. Additionally, they may provide coverage of risks which is neither available nor offered in the traditional insurance market at reasonable prices.
The types of risk that a captive can underwrite for their parents include property damage, public and products liability, professional indemnity, employee benefits, employers liability, motor and medical aid expenses. The captive's exposure to such risks may be limited by the use of reinsurance.
Captives are becoming an increasingly important component of the risk management and risk financing strategy of their parent. This can be understood against the following background:
- heavy and increasing premium costs in almost every line of coverage;
- difficulties in insuring certain types of fortuitous risk;
- differential coverage standards in various parts of the world;
- rating structures which reflect market trends rather than individual loss experience;
- insufficient credit for deductibles and/or loss control efforts.
There are also companies known as 'insurance consultants'. Like a mortgage broker, these companies are paid a fee by the customer to shop around for the best insurance policy amongst many companies. Similar to an insurance consultant, an 'insurance broker' also shops around for the best insurance policy amongst many companies. However, with insurance brokers, the fee is usually paid in the form of commission from the insurer that is selected rather than directly from the client.
Neither insurance consultants nor insurance brokers are insurance companies and no risks are transferred to them in insurance transactions. Third party administrators are companies that perform underwriting and sometimes claims handling services for insurance companies. These companies often have special expertise that the insurance companies do not have.
The financial stability and strength of an insurance company should be a major consideration when purchasing an insurance contract. An insurance premium paid currently provides coverage for losses that might arise many years in the future. For that reason, the viability of the insurance carrier is very important. In recent years, a number of insurance companies have become insolvent, leaving their policyholders with no coverage (or coverage only from a government-backed insurance pool or other arrangement with less attractive payouts for losses). A number of independent rating agencies, such as Best's , Fitch , Standard & Poor's , and Moody's Investors Service , provide information and rate the financial viability of insurance companies.
Insurance law
Insurance law is the name given to practices of law surrounding insurance , including insurance policies and claims. It can be broadly broken into two categories - regulation of the business of insurance and regulation of claim handling.
In the United States
As a preliminary matter, insurance companies are generally required to follow all of the same laws and regulations as any other type of business. This would include zoning and land use, wage and hour laws, tax laws, and securities regulations. There are also other regulations that insurers must also follow.
Regulation of the business of insurance
Insurance regulation that governs the business of insurance is typically aimed at assuring the solvency of insurance companies. Thus, this type of regulation governs capitalization, reserve policies, rates and various other "back office" processes.
In the United States each state typically has a statute creating an adminsitrative agency. These state agencies are typically called the Department of Insurance, or some similar name, and the head official is the Insurance Commissioner, or a similar titled officer. The agency then creates a group of administrative regulations to govern insurance companies which are domociled in, or do business in the state.
The origins of insurance policies in general differs through various countries. Limited policies (particularly against damage to homes) can be traced to the 17th and 18th centuries, though establishment of newer policies (such as health insurance and car insurance ) did not come until the 20th century.
In the United States regulation of insurance companies is almost exlusively conducted by the several states and their insurance departments. Various states have different names for their regulatory agencies and regulators. In many states the department is called the Department of Insurance, and the regulator is called the Insurance Commissioner - although there are numerous variations. The federal government has explicitly exempted insurance from federal regulation in most cases.
However, regulation of the insurance industry began in the 1940s in the United States , through several supreme court rulings. The first ruling on insurance had taken place in 1868 (in the Paul v. Virginia ruling ), with the supreme court ruling that insurance policy contracts were not in themselves commercial contracts. This stance did not change until 1944 (in the United States v. South-Eastern Underwriters Association ruling), when the Supreme court upheld a ruling stating that policies were commercial, and thus were regulatable as other similar contracts were.
Nowadays, many countries - and states in the United States - regulate insurance companies through laws, guidelines and independent commissions and regulatory bodies. These laws and statutes ensure that the policy holder is protected against bad faith claims on the insurer's part, that premiums are not unduly high (or fixed), and that contracts and policies issued meet a minimum standard.
A bad faith action may constitute several possibilities; the insurer denies a claim which is seemingly valid in the contract or policy, the insurer refuses to pay out for an unreasonable amount of time, the insurer lays the burden of proof on the insured - often in the case where the claim is unprovable. Other issues of insurance law may arise when price fixing occurs between insurers, creating an unfair competitive environment for consumers. A notable example of this is where Zurich Financial Services - along with several other insurers - inflated policy prices in an anti-competitive fashion. If an insurer is found to be guilty of fraud or deception, they can be fined either by regulatory bodies, or in a lawsuit by the insured or surrounding party. In more severe cases, or if the party has had a series of complaints or rulings, the insurers license may be revoked or suspended.
In the case that an insurer declares bankruptcy , many countries operate independent services and regulation to ensure as little financial hardship is incurred as possible ( National Association of Insurance Commissioners operates such a service in the United States ).
Source : wikipedia.org