Insurance Auto Auctions, Inc. Business Information, Profile, and History

Related information about Insurance

A system of guarding an individual or institution against the possibility of an event occurring which will cause some harm - usually financial. The insured pays a fee (the premium) to an insurance company. The size of the premium (calculated by actuaries) depends on the size of the risk at stake, the number of premiums to be received, and the risk (or chance) of the event occurring. It is possible to obtain cover against most events. There are four main classes of insurance: marine, fire, life, and accident. An insurance broker is an agent for anyone who wishes to be insured, by finding others who are willing to underwrite the risk. Their commission is termed brokerage.

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Insurance, in law and economics, is a form of risk management primarily used to hedge against the risk of potential financial loss. Insurance is defined as the equitable transfer of the risk of a potential loss, from one entity to another, in exchange for a premium and duty of care. It cannot put the insurance company in financial jeopardy.

Losses must be uncertain.

The rate and distribution of losses must be predictable: To set premiums (prices) insurers must be able to estimate them accurately. This is done using the Law of Large Numbers which states that: The larger the number of homogenous exposures considered, the more closely the losses reported will equal the underlying probability of loss. (e.g., the insuring of Tina Turner's legs and Jennifer Lopez's buttocks)

The loss must be significant: The legal principle of De minimis dictates that trivial matters are not covered. Furthermore, rational insurance uses existing insurance when the transaction costs dictate that filing a claim is not rational. This is the difference between deciding before the contract the parameters and after following through.

The loss must not be catastrophic: If the insurer is insolvent, it will be unable to pay the insured. www.ncigf.org This program is run by the National Association of Insurance Commissioners (NAIC). www.naic.org/ To avoid catastrophic depletion of their own capital, insurers almost universally purchase reinsurance to protect them against excessively large accumulations of risk in a single area, and to protect them against large-scale catastrophes.

Additionally, ?speculative risks? like those incurred through gambling or through the purchase of company stocks are uninsurable.

Insurance Contract Principles

A property or liability insurance policy is a "personal contract," a "conditional contract," a "unilateral contract," a "contract of adhesion," a "contract of indemnity," and a contract which requires that the person insured have an insurable interest at the time of the insured-against contingency.

Further: An Insurance Contract is one of Uberrima fides. This means that all parties to an insurance contract must deal in utmost good faith, making a full declaration of all material facts in the insurance proposal.

Contract of Adhesion

Property and liability insurance policies are said to be "contracts of adhesion" because the insurer and insured parties are generally of unequal bargaining power where the insured party cannot negotiate the terms of the contract and must take the offer of the insurer as made. And for life insurance, if the language does not meet insurance code minimums, the minimum is automatically read into the contract.

Contract of Indemnity

Property and liability insurance policies are said to be "contracts of indemnity" because the purpose of insurance is to indemnify the insured?that is, to make good a loss that the insured has suffered. One can only collect at the time of loss if insurable interest then exists.

In life insurance, one only needs insurable interest at the time the policy is taken - no continuing insurable interest is required. Controversial areas include corporate-owned life insurance, investor-owned life insurance and viatical settlements.

Indemnification

An entity seeking to transfer risk (an individual, corporation, or association of any type) becomes the 'insured' party once risk is assumed by an 'insurer', the insuring party, by means of a contract, defined as an insurance 'policy'. This legal contract sets out terms and conditions specifying the amount of coverage (compensation) to be rendered to the insured, by the insurer upon assumption of risk, in the event of a loss, and all the specific perils covered against (indemnified), for the term of the contract.

When insured parties experience a loss for a specified peril, the coverage entitles the policyholder to make a 'claim' against the insurer for the amount of loss as specified by the policy contract. The fee paid by the insured to the insurer for assuming the risk is called the 'premium'. Insurance premiums from many clients are used to fund accounts set aside for later payment of claims?in theory for a relatively few claimants?and for overhead costs. Through underwriting, the process through which insurers select what risks to insure and decide how much premium to charge for accepting those risks and by investing the premiums they have collected from insureds.

The most difficult aspect of the insurance business is the underwriting of policies. Actuarial science uses statistics and probability to analyze the risks associated with the range of perils covered, and these scientific principles are used to determine the insurers overall exposure. At the end of a given policy, the amount of premium collected minus the amount paid out in claims is the insurer's underwriting profit.

An insurer's underwriting performance is measured in their combined ratio. The combined ratio is a reflection of the company's overall underwriting profitability.

Insurance companies also earn investment profits on ?float?. Insurers start investing insurance premium as soon as it is collected and keeps earning interest on it until claims are paid out.

In the United States, the underwriting loss of property and casualty insurance companies was $142.3 billion in the five years ending 2003. Some insurance industry insiders, most notably Hank Greenberg, do not believe that it is forever possible to sustain a profit from float without an underwriting profit as well, but this opinion is not universally held.
Naturally, the ?float? So a poor economy generally means high insurance premiums.

Insurers currently make the most money from their auto insurance line of business. -->
Some people consider insurance a type of wager (particularly as associated with moral hazard) that executes over the policy period. The difference in the fees paid to the insurance company versus the amount for which they can be held liable if an accident happens is roughly analogous to the odds one might expect when betting on a racehorse (for example, 10 to 1). For this reason, a number of religious groups, including the Amish and some Muslim groups, avoid insurance and instead depend on support provided by their communities when disasters strike.

However, most societies could not effectively support this type of system, and the system will not work for large risks. This is the reason why most U.S. homeowner's insurance does not cover floods. A company that sells homeowner's insurance in a given city can accurately estimate the number of claims it would have to pay due to fires, tornadoes, and other smaller-scale disasters. A prime example of this is the flooding in New Orleans as a result of Hurricane Katrina. For the same reason, losses due to war and earthquakes are generally excluded. However, to obtain certain types of insurance, such as fire insurance, policyholders are often required to conduct risk mitigation practices, such as installing sprinklers and using fireproof building materials to reduce the odds of loss to fire. In addition, after a proven loss, insurers specialize in providing rehabilitation to minimize the total loss.

While insurance is analogous to gambling in terms of risk and reward, the main difference is in the motivation behind the process (risk seeking vs. for an insurance transaction, there is an exogenous relationship, usual economic or familial, that is connected to the insurance?which is a way of restating the insurance interest requirement.) With insurance, you are managing risk that you could not otherwise avoid, and which does not present the possibility of gain (pure risk). An example is United States Patent 6,869,362, "Method and apparatus for providing insurance policies for gambling losses"

History of insurance

Early methods of transferring or distributing risk were practiced by Chinese and Babylonian traders as long ago as the 3rd and 2nd millennia BCE respectively. 1750 BC, and practiced by early Mediterranean sailing merchants. 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 acted to care for the families and 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 in case of emergency.

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. Today, Lloyd's of London remains the leading market 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 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 provided 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.

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 commissioner's organization. In recent years, some have called for a federal regulatory system for insurance similar to that of the banking industry.

In the State of New York, which has unique laws in keeping with its stature as a global business center, Attorney General Eliot Spitzer has been in a unique position to grapple with major national insurance brokerages. Spitzer alleged that Marsh & McLennan steered business to insurance carriers based on the amount of contingent commissions that could be extracted from carriers, rather than basing decisions on whether carriers had the best deals for clients. Among the different types of insurance are:

• Automobile insurance, also known as auto insurance, car insurance and in the UK as motor insurance, is probably the most common form of insurance and may cover both legal liability claims against the driver and loss of or damage to the vehicle itself. Over most of the United States purchasing an auto insurance policy is required to legally operate a motor vehicle on public roads. In some jurisdictions, bodily injury compensation for automobile accident victims has been changed to No Fault systems, which reduce or eliminate the ability to sue for compensation but provide automatic eligibility for benefits.
  
• Boiler insurance (also known as Boiler and Machinery insurance or Equipment Breakdown Insurance)
  
• Casualty insurance insures against accidents, not necessarily tied to any specific property.
  
• Credit insurance pays some or all of a loan back when certain things happen to the borrower such as unemployment, disability, or death.
  
• Directors and Officers Insurance protects an organization (usually a corporation) from costs associated with litigation resulting from mistakes incurred by directors and officers for which they are liable. In the industry, it is usually called "D&O" for short.
  
• Financial loss insurance protects individuals and companies against various financial risks. For example, a business might purchase cover to protect it from loss of sales if a fire in a factory prevented it from carrying out its business for a time. Insurance might also cover failure of a creditor to pay money it owes to the insured. Fidelity bonds and surety bonds are included in this category.
  
• Health insurance covers medical bills incurred because of sickness or accidents.
  
• Liability insurance covers legal claims against the insured. Similarly, a doctor may purchase liability insurance to cover any legal claims against him if his negligence (carelessness) in treating a patient caused the patient injury and/or monetary harm. The protection offered by a liability insurance policy is two-fold: a legal defense in the event of a lawsuit commenced against the policyholder, plus indemnification (payment on behalf of the insured) with respect to a settlement or court verdict.
  
• Life insurance provides a cash benefit to a decedent's family or other designated beneficiary, and may specifically provide for burial, funeral and other final expenses.
  
  • Annuities provide a stream of payments and are generally classified as insurance because they are issued by insurance companies and regulated as insurance. Annuities and pensions that pay a benefit for life are sometimes regarded as insurance against the possibility that a retiree will outlive his or her financial resources. In that sense, they are the complement of life insurance.
    
• Total permanent disability insurance insurance provides benefits when a person is permanently disabled and can no longer work in their profession, often taken as an adjunct to life insurance.
  
• Locked Funds Insurance is a little known hybrid insurance policy jointly issued by governments and banks. As such it is only used in extreme cases where maximum security of funds is required.
  
• Marine Insurance covers the loss or damage of goods at sea. Marine insurance typically compensates the owner of merchandise for losses sustained from fire, shipwreck, etc., but excludes losses that can be recovered from the carrier.
  
• Nuclear incident insurance ? (For the United States, see Price-Anderson Nuclear Industries Indemnity Act.)
  
• Environmental Liability Insurance protects the insured from bodily injury, property damage and cleanup costs as a result of the dispersal, release or escape of a pollutant.
  
• Pet Insurance insures pets against accidents and illnesses - some companies cover routine/wellness care and burial, as well.
  
• Political risk insurance can be taken out by businesses with operations in countries in which there is a risk that revolution or other political conditions will result in a loss.
  
• Professional Indemnity Insurance is normally a mandatory requirement for professional practitioners such as Architects, Lawyers, Doctors and Accountants to provide insurance cover against potential negligence claims. Non licensed professionals may also purchase malpractice insurance, it is commonly called Errors and Omissions Insurance and covers a service provider for claims made against them that arise out of the performance of specified professional services. For instance, a web site designer can obtain E&O insurance to cover them for certain claims made by third parties that arise out of negligent performance of web site development services.
  
• Property insurance provides protection against risks to property, such as fire, theft or weather damage. This includes specialized forms of insurance such as fire insurance, flood insurance, earthquake insurance, home insurance, inland marine insurance or boiler insurance.
  
• Terrorism insurance
  
• Title insurance provides a guarantee that title to real property is vested in the purchaser and/or mortgagee, free and clear of liens or encumbrances. It is usually issued in conjunction with a search of the public records done at the time of a real estate transaction.
  
• Travel insurance is an insurance cover taken by those who travel abroad, which covers certain losses such as medical expenses, lost of personal belongings, travel delay, personal liabilities.. etc.
  
• Workers' compensation insurance replaces all or part of a worker's wages lost and accompanying medical expense incurred due to a job-related injury. A homeowner's insurance policy in the U.S. typically includes property insurance covering damage to the home and the owner's belongings, liability insurance covering certain legal claims against the owner, and even a small amount of health insurance for medical expenses of guests who are injured on the owner's property.
  

  Potential sources of risk that may give rise to claims are known as "perils". Examples of perils might be fire, theft, earthquake, hurricane and many other potential risks. An insurance policy will set out in details which perils are covered by the policy and which are not.
  

  Types of insurance companies

  Insurance companies may be classified as
  
  
  • Life insurance companies, who sell life insurance, annuities and pensions products.
    
  • Non-life or general insurance companies, who sell other types of insurance.
    

  In most countries, life and non-life insurers are subject to different regulations, tax and accounting rules. Mutual companies are owned by the policyholders, while stockholders, (who may or may not own policies) own stock insurance companies.
  

  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.
  

  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 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.
  

  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.
  

  Life insurance and saving

  Certain life insurance contracts accumulate cash values, which may be taken by the insured if the policy is surrendered or which may be borrowed against. Some policies, such as annuities and endowment policies, are financial instruments to accumulate or liquidate wealth when it is needed.
  
  In many countries, such as the U.S. and the UK, tax law provides that the interest on this cash value is not taxable under certain circumstances. This leads to widespread use of life insurance as a tax-efficient method of saving as well as protection in the event of early death.
  
  In U.S., interest income of life insurance policy (or annuity) is income tax deferred in general.

  Size of global insurance industry

  Global insurance premiums grew by 9.7% in 2004 to reach $3.3 trillion. www.ifsl.org.uk/uploads/CBS_Insurance_2005.pdf

  Financial viability of insurance companies

  Financial stability and strength of the insurance company should be a major consideration when purchasing an insurance contract. 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 with less attractive payouts for losses). This problem is known to the insurance industry as moral hazard. To reduce their own financial exposure, insurance companies have contractual clauses that mitigate their obligation to provide coverage if the insured engages in some kind of behavior that grossly magnifies their risk of loss or liability.
  
  For example, life insurance providers may require higher premiums or deny coverage to people who work hazardous occupations or engage in dangerous sports. Liability insurance providers do not provide coverage for liability arising from intentional torts committed by the insured.

  Complexity of insurance policy contracts

  Insurance policies can be complex and some policyholders may not understand all the fees, regulation and coverages included in a policy. In response to these issues, governments often make detailed regulations that set down minimum standards for policies and govern how they may be advertised and sold.
  
  Many individuals purchase policies through an insurance broker. A broker generally holds contracts with many insurers which allows the broker to "shop" the market for the best rates and coverage possible.
  
  People may also purchase policies through a "producer" (a seller of insurance).
  
  Evaluation of risk, when an insurer determines a premium or premium rate structure, considers quantifiable factors, including location, credit scores, gender, occupation, marital status, and education level. However, the use of these essential factors, whether inappropriately or not, are often considered to be unfair or discriminatory by some consumers and their advocates, sometimes leading to political disputes about insurers' determination of premiums and possible government intervention to limit the factors used.
  
  A refutation to this is that the job of an insurance underwriter is to properly categorize a given risk as to the likelihood that the loss will occur. This is a basic principle of insurance and must be followed for insurance companies or groups to operate properly, even for non-profit organizations. Therefore the only thing that can be considered legitimately unfair are practices that discriminate against a given group without actual factors that show that the group is a higher risk. In theory, the market for health insurance provision should function in a manner similar to other insurance coverages, but the skyrocketing cost of health coverage has disrupted markets around the globe, but perhaps most glaringly in the U.S. Please see health insurance for a discussion of this category.

  Dental insurance

  Dental insurance, like health insurance, is coverage for individuals to protect them against dental costs. Dental insurance usually goes hand-in-hand with health insurance, with most people in the United States receiving it included in their health insurance plan from their employer. Along with receiving dental insurance from your employer, there are ways to receive dental insurance through resellers and companies for individuals and families;

  Insurance Patents

  New insurance products can now be protected from copying with a business method patent. This may lead to the more rapid introduction of new insurance products as insurance companies will invest more heavily in new product development if they can be reasonably assured that their patents will keep those products from being copied.
  
  A recent example of a new insurance product that is patented is telematic auto insurance. It was independently invented and patented by a major U.S. auto insurance company, Progressive Auto Insurance (U.S. patent 5,797,134) and a Spanish independent inventor, Salvador Minguijon Perez (European Patent EP0700009B1).
  
  The basic idea of telematic auto insurance is that a driver's behavior is monitored directly while the person drives and this information is transmitted to an insurance company. The insurance company then assesses the risk of that driver having an accident and charges insurance premiums accordingly.
  
  A British auto insurance company, Norwich Union, has taken a license to both the Progressive patent and Perez patent.
  
  Many independent inventors are in favor of patenting new insurance products since it gives them protection from big companies when they bring their new insurance products to market. Independent inventors account for 70% of the new U.S. patent applications in this area.
  
  Many insurance executives are opposed to patenting insurance products because it creates a new risk for them. The Hartford insurance company, for example, had to recently pay US$80 million to an independent inventor, Bancorp Services, in order to settle a patent infringement and theft of trade secret lawsuit for a new type of corporate owned life insurance product invented and patented by Bancorp.
  
  There are currently about 150 new patent applications on insurance inventions filed per year in the United States. (Source: Insurance IP Bulletin, December 15, 2005).

  The insurance industry and rent seeking

  Certain insurance products and practices have been described as rent seeking by critics. That is, insurance companies have been alleged to have certain products or practices that are only useful due to certain government laws (especially tax laws), and that the insurance industry in these cases generally adds no economic value but instead supports politicians who will continue the legal regime which gives the insurance company these benefits. For example, in the United States the current tax rules generally allow owners of variable annuities (see annuity (US financial products) and variable life insurance (see variable universal life insurance) to invest in the stock market and defer or eliminate paying any taxes until withdrawals are made. Another example is the legal infrastructure which allows life insurance to be held in an irrevocable trust which is used to pay an estate tax while the proceeds itself are immune from the estate tax. A lower number indicates a better return on the amount of capital placed at risk by an insurer.
  

Quote

• Hank Greenberg told his board of directors, "you can't even spell 'insurance'"editor.slate.msn.com/default.aspx/id/2116167/nav/ais/ (hearsay, April 2005)
  

See also

• Financial services (broader industry to which insurance belongs)
  
• Insurance Services Office
  
• Intergovernmental Risk Pool
  
• Subrogation
  
• Uberrima fides
  

Lists

• List of finance topics
  
• List of insurance topics
  
• List of United States insurance companies