Medical education in the United States includes educational activities involved in the education and training of physicians in the country,
with the overall process going from entry-level training efforts
through to the continuing education of qualified specialists in the
context of American colleges and universities.
In the U.S., a medical school
is an institution with the purpose of educating medical students in the
field of medicine. Admission into medical school may not technically
require completion of a previous degree; however, applicants are usually
required to complete at least 3 years of "pre-med" courses at the university level because in the US medical degrees are classified as Second entry degrees.
Once enrolled in a medical school the four years progressive study is
divided into two roughly equal components: pre-clinical (consisting of
didactic courses in the basic sciences) and clinical (clerkships consisting of rotations through different wards of a teaching hospital). The degree granted at the conclusion of these four years of study is Doctor of Medicine (M.D.) or Doctor of Osteopathic Medicine
(D.O.) depending on the medical school; both degrees allow the holder
to practice medicine after completing an accredited residency program.
During the last year of graduate medical education, students apply for postgraduate residencies in their chosen field of specialization.
These vary in competitiveness depending upon the desirability of the
specialty, prestige of the program, and the number of applicants
relative to the number of available positions. All but a few positions
are granted via a national computer match which pairs an applicant's
preference with the programs' preference for applicants.
Historically, post-graduate medical education began with a
free-standing, one-year internship. Completion of this year continues to
be the minimum training requirement for obtaining a general license to
practice medicine in most states. However, because of the gradual
lengthening of post-graduate medical education, and the decline of its
use as the terminal stage in training, most new physicians complete the
internship requirement as their first year of residency.
Not withstanding the trend toward internships integrated into
categorical residencies, the one-year "traditional rotating internship"
(sometimes called a "transitional year") continues to exist. Some
residency training programs, such as in neurology and ophthalmology,
do not include an internship year and begin after completion of an
internship or transitional year. Some use it to re-apply to programs
into which they were not accepted, while others use it as a year to
decide upon a specialty. In addition, osteopathic physicians "are required to have completed an American Osteopathic Association (AOA)-approved first year of training in order to be licensed in Florida, Michigan, Oklahoma and Pennsylvania."
Each of the specialties in medicine has established its own
curriculum, which defines the length and content of residency training
necessary to practice in that specialty. Programs range from 3 years
after medical school for internal medicine and pediatrics, to 5 years
for general surgery, to 7 years for neurosurgery. Each specialty
training program either incorporates an internship year to satisfy the
requirements of state licensure, or stipulates that an internship year
be completed before starting the program at the second post-graduate year (PGY-2).
A fellowship is a formal, full-time training program that focuses on a
particular area within the specialty, with requirements beyond the
related residency. Many highly specialized fields require formal training beyond residency. Examples of these include cardiology, endocrinology, oncology after internal medicine; cardiothoracic anesthesiology after anesthesiology; cardiothoracic surgery, pediatric surgery, surgical oncology after general surgery; reproductive endocrinology/infertility, maternal-fetal medicine, gynecologic oncology
after obstetrics/gynecology. There are many others for each field of
study. In some specialties such as pathology and radiology, a majority
of graduating residents go on to further their training. The training
programs for these fields are known as fellowships and their participants are fellows,
to denote that they already have completed a residency and are board
eligible or board certified in their basic specialty. Fellowships range
in length from one to three years and are granted by application to the
individual program or sub-specialty organizing board. Fellowships often contain a research component.
The physician or surgeon who has completed their residency and
possibly fellowship training and is in the practice of their specialty
is known as an attending physician.
Physicians then must pass written and oral exams in their specialty in
order to become board certified. Each of the 26 medical specialties
has different requirements for practitioners to undertake continuing medical education activities.
Continuing medical education (CME) refers to educational activities
designed for practicing physicians. Many states require physicians to
earn a certain amount of CME credit in order to maintain their
licenses. Physicians can receive CME credit from a variety of
activities, including attending live events, publishing peer-reviewed
articles, and completing online courses. The Accreditation Council for Continuing Medical Education (ACCME) determines what activities are eligible for CME.
Doctors
may work independently, as part of a larger group practice, or for a
hospital or healthcare organization. Independent practices are defined
as one in which the physician owns a majority of his or her practice and
has decision making rights. In 2000, 57% of doctors were independent,
but this decreased to 33% by 2016. Between 2012 and 2015, there was a
50% increase in the number of physicians employed by hospitals.
26 percent have opted out of seeing patients with Medicaid and 15
percent have opted out of seeing patients with health insurance exchange
plans.
On average, physicians in the US work 55 hours each week and earn
a salary of $270,000, although work hours and compensation vary by
specialty. 25% of physicians work more than 60 hours per week.
Demographics
While an impending "doctor shortage"
has been reported, from 2010 to 2018, the actively licensed U.S.
physician-to-population ratio increased from 277 to 301 physicians per
100,000 people. Additionally, the number of female physicians, and
osteopathic and Caribbean graduates have increased at a greater
percentage.
As of 2018, there were over 985,000 practicing physicians in the
United States. 90.6% have an MD degree, and 76% were educated in the
United States. 64% were male. 82% were licensed in a medical specialty. 22% held active licenses in two or more states.
The percentage of females skews younger. In 2018, 33% of female
physicians were under 40 years old, compared with 19% of male
physicians. The District of Columbia has, by far, the largest number of physicians as a percentage of the population, with 1,639 per 100,000 people.
Additionally, Among active physicians, 56.2% identified as White, 17.1%
identified as Asian, 5.8% identified as Hispanic, 5.0% identified as
Black, and 0.3% identified as American Indian/Alaska Native.
Specialists
The term, hospitalist, was introduced in 1996, to describe US specialists in internal medicine who work largely or exclusively in hospitals. Such 'hospitalists' now make up about 19% of all US general internists.
All boards of certification now require that medical practitioners
demonstrate, by examination, continuing mastery of the core knowledge
and skills for a chosen specialty. Recertification varies by particular
specialty between every eight and ten years.
Salaries
Pay gap by gender and race
The
average salary for white male physicians was $253,000 compared with
$188,230 for black male physicians, $163,000 for white female
physicians, and $153,000 for black female physicians.
Medscape's 2019 Physician Compensation Report
found that "males out-earned their female counterparts in both primary
care and specialist positions with men earning 25% and 33% more,
respectively."
The AMA has advocated to reduce gender bias and close the pay gap.
The AMA said that “significant sex differences in salary exist even
after accounting for age, experience, specialty, faculty rank, and
measures of research productivity and clinical revenue.”
A 2015 study of gender pay disparities among hospitalists found that
women were more likely to be working night shifts despite having lower
salaries. In 2018, the AMA delegates advocated for transparency in
defining the criteria for initial and subsequent physician compensation,
that pay structures be based on objective, gender-neutral objective
criteria, and that institutes take a specified approach using metrics
for all employees to identify gender disparity.
The AMA has also advocated to move USMLE Step 1 to pass/fail to decrease racial bias. A 2020 study
showed lack of diversity within specialities and that that
underrepresented students were more likely to go into specialities that
have lower Step 1 cut offs like Primary Care.
Pay cuts due to COVID
One in five physicians reported having a pay cut during the COVID-19 pandemic. The majority of the monetary loss was a result of low volume of patients and lack of elective surgeries.
Compared to foreign countries
The United States has the highest paid general practitioners in the world. The US has the second-highest paid specialists in the world behind the Netherlands. Public and private payers pay higher fees to US primary care physicians for office visits
(overall 27 percent more for public and 70 percent more for private)
than in Australia, Canada, France, Germany and the United Kingdom.
US primary care physicians also earn more (overall earning $186,000
yearly) than the foreign counterparts, with even higher numbers for physician compensation for medical specialists.
Higher fees, rather than factors such as higher practice costs, volume
of services, or tuition expenses, mainly drive higher US spending.
A 2011 survey of 15,000 physicians practicing in the United States
reported that, across all specialties, male physicians earned
approximately 41% more than female physicians. Also, female physicians were more likely to report working fewer hours than their male counterparts.
The same survey reported that, the highest-earning physicians were located in North Central region, comprising Kansas, Nebraska, North and South Dakota, Iowa, and Missouri, with a median salary of $225,000 per year, as per 2010. The next highest earning physicians were those in the South Central region, comprising Texas, Oklahoma, and Arkansas,
at $216,000. Those physicians reporting the lowest compensation levels
were located in the Northeast and Southwest, earning an across-specialty
median annual income of $190,000.
The survey concluded that physicians in small cities
(50,000–100,000) earned slightly more than those living in community
types of other sizes, ranging from metropolitan to rural, but the
differences were only marginal (a few percent more or less).
Other results from the survey were that those running a solo
practice earned marginally less than private practice employees, who, in
turn, earned marginally less than hospital employees.
The Bureau of Labor Statistics reports mean annual income for
physicians at $251,990, and mean annual income for surgeons at $337,980,
as of 2022.
In addition, the completion of a residency
is required to practice independently. Residency is accredited by the
ACGME and is the same regardless of degree type. After residency,
physicians can become board certified by their specialty board.
Physicians must have a medical license to practice in any state.
Insurance is a means of protection from financial loss in
which, in exchange for a fee, a party agrees to compensate another party
in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to hedge against the risk of a contingent or uncertain loss.
An entity which provides insurance is known as an insurer, insurance company, insurance carrier, or underwriter. A person or entity who buys insurance is known as a policyholder, while a person or entity covered under the policy is called an insured.
The insurance transaction involves the policyholder assuming a
guaranteed, known, and relatively small loss in the form of a payment to
the insurer (a premium) in exchange for the insurer's promise to
compensate the insured in the event of a covered loss. The loss may or
may not be financial, but it must be reducible to financial terms.
Furthermore, it usually involves something in which the insured has an insurable interest established by ownership, possession, or pre-existing relationship.
The insured receives a contract, called the insurance policy,
which details the conditions and circumstances under which the insurer
will compensate the insured, or their designated beneficiary or
assignee. The amount of money charged by the insurer to the policyholder
for the coverage set forth in the insurance policy is called the premium.
If the insured experiences a loss which is potentially covered by the
insurance policy, the insured submits a claim to the insurer for
processing by a claims adjuster. A mandatory out-of-pocket expense required by an insurance policy before an insurer will pay a claim is called a deductible (or if required by a health insurance policy, a copayment). The insurer may hedge its own risk by taking out reinsurance,
whereby another insurance company agrees to carry some of the risks,
especially if the primary insurer deems the risk too large for it to
carry.
Merchants have sought methods to minimize risks since early times. Pictured, Governors of the Wine Merchant's Guild by Ferdinand Bol, c. 1680.
Methods for transferring or distributing risk were practiced by Babylonian, Chinese and Indian traders as long ago as the 3rd and 2ndmillennia BC, respectively.
Chinese merchants travelling treacherous river rapids would
redistribute their wares across many vessels to limit the loss due to
any single vessel capsizing.
Concepts of insurance has been also found in 3rd century BC Hindu scriptures such as Dharmasastra, Arthashastra and Manusmriti.
The ancient Greeks had marine loans. Money was advanced on a ship or
cargo, to be repaid with large interest if the voyage prospers. However,
the money would not be repaid at all if the ship were lost, thus making
the rate of interest high enough to pay for not only for the use of the
capital but also for the risk of losing it (fully described by Demosthenes). Loans of this character have ever since been common in maritime lands under the name of bottomry and respondentia bonds.
The direct insurance of sea-risks for a premium paid independently of loans began in Belgium about 1300 AD.
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. The first known insurance contract dates from Genoa in
1347. In the next century, maritime insurance developed widely, and
premiums were varied with risks.
These new insurance contracts allowed insurance to be separated from
investment, a separation of roles that first proved useful in marine insurance.
The earliest known policy of life insurance was made in the Royal Exchange, London, on the 18th of June 1583, for £383, 6s. 8d. for twelve months on the life of William Gibbons.
Modern methods
Insurance became far more sophisticated in Enlightenment-eraEurope, where specialized varieties developed.
Property insurance as we know it today can be traced to the Great Fire of London,
which in 1666 devoured more than 13,000 houses. The devastating effects
of the fire converted the development of insurance "from a matter of
convenience into one of urgency, a change of opinion reflected in Sir Christopher Wren's inclusion of a site for "the Insurance Office" in his new plan for London in 1667." A number of attempted fire insurance schemes came to nothing, but in 1681, economistNicholas Barbon
and eleven associates established the first fire insurance company, the
"Insurance Office for Houses", at the back of the Royal Exchange to
insure brick and frame homes. Initially, 5,000 homes were insured by his
Insurance Office.
At the same time, the first insurance schemes for the underwriting of business ventures
became available. By the end of the seventeenth century, London's
growth as a centre for trade was increasing due to the demand for marine insurance. In the late 1680s, Edward Lloyd opened a coffee house,
which became the meeting place for parties in the shipping industry
wishing to insure cargoes and ships, including those willing to
underwrite such ventures. These informal beginnings led to the
establishment of the insurance market Lloyd's of London and several related shipping and insurance businesses.
It was the world's first mutual insurer and it pioneered age based premiums based on mortality rate
laying "the framework for scientific insurance practice and
development" and "the basis of modern life assurance upon which all life
assurance schemes were subsequently based."
In the late 19th century "accident insurance" began to become available.
The first company to offer accident insurance was the Railway
Passengers Assurance Company, formed in 1848 in England to insure
against the rising number of fatalities on the nascent railway system.
The first international insurance rule was the York Antwerp Rules
(YAR) for the distribution of costs between ship and cargo in the event
of general average. In 1873 the "Association for the Reform and
Codification of the Law of Nations", the forerunner of the International Law Association
(ILA), was founded in Brussels. It published the first YAR in 1890,
before switching to the present title of the "International Law
Association" in 1895.
By the late 19th century governments began to initiate national insurance programs against sickness and old age. Germany built on a tradition of welfare programs in Prussia and Saxony that began as early as in the 1840s. In the 1880s Chancellor Otto von Bismarck introduced old age pensions, accident insurance and medical care that formed the basis for Germany's welfare state. In Britain more extensive legislation was introduced by the Liberal government in the 1911 National Insurance Act. This gave the British working classes the first contributory system of insurance against illness and unemployment. This system was greatly expanded after the Second World War under the influence of the Beveridge Report, to form the first modern welfare state.
In 2008, the International Network of Insurance Associations
(INIA), then an informal network, became active and it has been
succeeded by the Global Federation of Insurance Associations
(GFIA), which was formally founded in 2012 to aim to increase insurance
industry effectiveness in providing input to international regulatory
bodies and to contribute more effectively to the international dialogue
on issues of common interest. It consists of its 40 member associations
and 1 observer association in 67 countries, which companies account for
around 89% of total insurance premiums worldwide.
Principles
Insurance involves pooling funds from many
insured entities (known as exposures) to pay for the losses that only
some insureds may incur. The insured entities are therefore protected
from risk for a fee, with the fee being dependent upon the frequency and
severity of the event occurring. In order to be an insurable risk, the risk insured against must meet certain characteristics. Insurance as a financial intermediary is a commercial enterprise and a major part of the financial services industry, but individual entities can also self-insure through saving money for possible future losses.
Risk which can be insured by private companies typically share seven common characteristics:
A large number of similar exposure units: Since insurance
operates through pooling resources, the majority of insurance policies
cover individual members of large classes, allowing insurers to benefit
from the law of large numbers in which predicted losses are similar to the actual losses. Exceptions include Lloyd's of London,
which is famous for insuring the life or health of actors, sports
figures, and other famous individuals. However, all exposures will have
distinct differences, which may lead to different premium rates.
Definite loss: This type of loss takes place at a known time and
place from a known cause. The classic example involves the death of an
insured person on a life insurance policy. Fire, automobile accidents, and worker injuries may all easily meet this criterion. Other types of losses may only be definite in theory. Occupational disease,
for instance, may involve prolonged exposure to injurious conditions
where no specific time, place, or cause is identifiable. Ideally, the
time, place, and cause of a loss should be clear enough that a
reasonable person, with sufficient information, could objectively verify
all three elements.
Accidental loss: The event that constitutes the trigger of a claim
should be fortuitous, or at least outside the control of the beneficiary
of the insurance. The loss should be pure because it results from an
event for which there is only the opportunity for cost. Events that
contain speculative elements such as ordinary business risks or even
purchasing a lottery ticket are generally not considered insurable.
Large loss: The size of the loss must be meaningful from the
perspective of the insured. Insurance premiums need to cover both the
expected cost of losses, plus the cost of issuing and administering the
policy, adjusting losses, and supplying the capital needed to reasonably
assure that the insurer will be able to pay claims. For small losses,
these latter costs may be several times the size of the expected cost of
losses. There is hardly any point in paying such costs unless the
protection offered has real value to a buyer.
Affordable premium: If the likelihood of an insured event is so
high, or the cost of the event so large, that the resulting premium is
large relative to the amount of protection offered, then it is not
likely that insurance will be purchased, even if on offer. Furthermore,
as the accounting profession formally recognizes in financial accounting
standards, the premium cannot be so large that there is not a
reasonable chance of a significant loss to the insurer. Suppose there is
no such chance of loss. In that case, the transaction may have the form
of insurance, but not the substance (see the U.S. Financial Accounting Standards Board pronouncement number 113: "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts").
Calculable loss: There are two elements that must be at least
estimable, if not formally calculable: the probability of loss and the
attendant cost. Probability of loss is generally an empirical exercise,
while cost has more to do with the ability of a reasonable person in
possession of a copy of the insurance policy and a proof of loss
associated with a claim presented under that policy to make a reasonably
definite and objective evaluation of the amount of the loss recoverable
as a result of the claim.
Limited risk of catastrophically large losses: Insurable losses are ideally independent
and non-catastrophic, meaning that the losses do not happen all at once
and that individual losses are not severe enough to bankrupt the
insurer; insurers may prefer to limit their exposure to a loss from a
single event to some small portion of their capital base. Capital constrains insurers' ability to sell earthquake insurance as well as wind insurance in hurricane zones. In the United States, the federal government insures flood risk
in specifically identified areas. In commercial fire insurance, it is
possible to find single properties whose total exposed value is well in
excess of any individual insurer's capital constraint. Such properties
are generally shared among several insurers or are insured by a single
insurer which syndicates the risk into the reinsurance market.
Legal
When a
company insures an individual entity, there are basic legal requirements
and regulations. Several commonly cited legal principles of insurance
include:
Indemnity – the insurance company indemnifies or compensates the insured in the case of certain losses only up to the insured's interest.
Benefit insurance – as it is stated in the study books of The
Chartered Insurance Institute, the insurance company does not have the
right of recovery from the party who caused the injury and must
compensate the Insured regardless of the fact that Insured had already
sued the negligent party for the damages (for example, personal accident
insurance)
Insurable interest
– the insured typically must directly suffer from the loss. Insurable
interest must exist whether property insurance or insurance on a person
is involved. The concept requires that the insured have a "stake" in the
loss or damage to the life or property insured. What that "stake" is
will be determined by the kind of insurance involved and the nature of
the property ownership or relationship between the persons. The
requirement of an insurable interest is what distinguishes insurance
from gambling.
Contribution – insurers, which have similar obligations to the
insured, contribute in the indemnification, according to some method.
Subrogation – the insurance company acquires legal rights to pursue
recoveries on behalf of the insured; for example, the insurer may sue
those liable for the insured's loss. The Insurers can waive their
subrogation rights by using the special clauses.
Causa proxima, or proximate cause – the cause of loss (the peril) must be covered under the insuring agreement of the policy, and the dominant cause must not be excluded
Mitigation – In case of any loss or casualty, the asset owner must
attempt to keep loss to a minimum, as if the asset was not insured.
To "indemnify" means to make whole again, or to be reinstated to the
position that one was in, to the extent possible, prior to the happening
of a specified event or peril. Accordingly, life insurance
is generally not considered to be indemnity insurance, but rather
"contingent" insurance (i.e., a claim arises on the occurrence of a
specified event). There are generally three types of insurance contracts
that seek to indemnify an insured:
A "reimbursement" policy
A "pay on behalf" or "on behalf of policy"
An "indemnification" policy
From an insured's standpoint, the result is usually the same: the insurer pays the loss and claims expenses.
If the Insured has a "reimbursement" policy, the insured can be
required to pay for a loss and then be "reimbursed" by the insurance
carrier for the loss and out of pocket costs including, with the
permission of the insurer, claim expenses.
Under a "pay on behalf" policy, the insurance carrier would
defend and pay a claim on behalf of the insured who would not be out of
pocket for anything. Most modern liability insurance is written on the
basis of "pay on behalf" language, which enables the insurance carrier
to manage and control the claim.
Under an "indemnification" policy, the insurance carrier can
generally either "reimburse" or "pay on behalf of", whichever is more
beneficial to it and the insured in the claim handling process.
An entity seeking to transfer risk (an individual, corporation,
or association of any type, etc.) becomes the "insured" party once risk
is assumed by an "insurer", the insuring party, by means of a contract, called an insurance policy.
Generally, an insurance contract includes, at a minimum, the following
elements: identification of participating parties (the insurer, the
insured, the beneficiaries), the premium, the period of coverage, the
particular loss event covered, the amount of coverage (i.e., the amount
to be paid to the insured or beneficiary in the event of a loss), and exclusions (events not covered). An insured is thus said to be "indemnified" against the loss covered in the policy.
When insured parties experience a loss for a specified peril, the
coverage entitles the policyholder to make a claim against the insurer
for the covered amount of loss as specified by the policy. The fee paid
by the insured to the insurer for assuming the risk is called the
premium. Insurance premiums from many insureds are used to fund accounts
reserved for later payment of claims – in theory for a relatively few
claimants – and for overhead
costs. So long as an insurer maintains adequate funds set aside for
anticipated losses (called reserves), the remaining margin is an
insurer's profit.
Exclusions
Policies typically include a number of exclusions, for example:
Insurers may prohibit certain activities which are considered
dangerous and therefore excluded from coverage. One system for
classifying activities according to whether they are authorised by
insurers refers to "green light" approved activities and events, "yellow
light" activities and events which require insurer consultation and/or
waivers of liability, and "red light" activities and events which are
prohibited and outside the scope of insurance cover.
Social effects
Insurance
can have various effects on society through the way that it changes who
bears the cost of losses and damage. On one hand it can increase fraud;
on the other it can help societies and individuals prepare for
catastrophes and mitigate the effects of catastrophes on both households
and societies.
Insurance can influence the probability of losses through moral hazard, insurance fraud, and preventive steps by the insurance company. Insurance scholars have typically used moral hazard
to refer to the increased loss due to unintentional carelessness and
insurance fraud to refer to increased risk due to intentional
carelessness or indifference.
Insurers attempt to address carelessness through inspections, policy
provisions requiring certain types of maintenance, and possible
discounts for loss mitigation efforts. While in theory insurers could
encourage investment in loss reduction, some commentators have argued
that in practice insurers had historically not aggressively pursued loss
control measures—particularly to prevent disaster losses such as
hurricanes—because of concerns over rate reductions and legal battles.
However, since about 1996 insurers have begun to take a more active role
in loss mitigation, such as through building codes.
Methods of insurance
According to the study books of The Chartered Insurance Institute, there are variant methods of insurance as follows:
Co-insurance – risks shared between insurers (sometimes referred to as "Retention")
Dual insurance – having two or more policies with overlapping
coverage of a risk (both the individual policies would not pay
separately – under a concept named contribution, they would contribute
together to make up the policyholder's losses. However, in case of
contingency insurances such as life insurance, dual payment is allowed)
Self-insurance – situations where risk is not transferred to
insurance companies and solely retained by the entities or individuals
themselves
Reinsurance – situations when the insurer passes some part of or all risks to another Insurer, called the reinsurer
Insurers' business model
Insurers may use the subscription business model, collecting premium payments periodically in return for on-going and/or compounding benefits offered to policyholders.
Underwriting and investing
Insurers'
business model aims to collect more in premium and investment income
than is paid out in losses, and to also offer a competitive price which
consumers will accept. Profit can be reduced to a simple equation:
Profit = earned premium + investment income – incurred loss – underwriting expenses.
Insurers make money in two ways:
Through underwriting,
the process by which insurers select the risks to insure and decide how
much in premiums to charge for accepting those risks, and taking the
brunt of the risk should it come to fruition.
By investing the premiums they collect from insured parties
The most complicated aspect of insuring is the actuarial science of ratemaking (price-setting) of policies, which uses statistics and probability
to approximate the rate of future claims based on a given risk. After
producing rates, the insurer will use discretion to reject or accept
risks through the underwriting process.
At the most basic level, initial rate-making involves looking at the frequency and severity
of insured perils and the expected average payout resulting from these
perils. Thereafter an insurance company will collect historical
loss-data, bring the loss data to present value, and compare these prior losses to the premium collected in order to assess rate adequacy. Loss ratios
and expense loads are also used. Rating for different risk
characteristics involves—at the most basic level—comparing the losses
with "loss relativities"—a policy with twice as many losses would,
therefore, be charged twice as much. More complex multivariate analyses
are sometimes used when multiple characteristics are involved and a
univariate analysis could produce confounded results. Other statistical
methods may be used in assessing the probability of future losses.
Upon termination of a given policy, the amount of premium collected minus the amount paid out in claims is the insurer's underwriting profit
on that policy. Underwriting performance is measured by something
called the "combined ratio", which is the ratio of expenses/losses to
premiums.
A combined ratio of less than 100% indicates an underwriting profit,
while anything over 100 indicates an underwriting loss. A company with a
combined ratio over 100% may nevertheless remain profitable due to
investment earnings.
Insurance companies earn investment
profits on "float". Float, or available reserve, is the amount of money
on hand at any given moment that an insurer has collected in insurance
premiums but has not paid out in claims. Insurers start investing
insurance premiums as soon as they are collected and continue to earn
interest or other income on them until claims are paid out. The Association of British Insurers (grouping together 400 insurance companies and 94% of UK insurance services) has almost 20% of the investments in the London Stock Exchange. In 2007, U.S. industry profits from float totaled $58 billion. In a 2009 letter to investors, Warren Buffett wrote, "we were paid $2.8 billion to hold our float in 2008".
In the United States, the underwriting loss of property and casualty insurance
companies was $142.3 billion in the five years ending 2003. But overall
profit for the same period was $68.4 billion, as the result of float.
Some insurance-industry insiders, most notably Hank Greenberg,
do not believe that it is possible to sustain a profit from float
forever without an underwriting profit as well, but this opinion is not
universally held. Reliance on float for profit has led some industry
experts to call insurance companies "investment companies that raise the
money for their investments by selling insurance".
Naturally, the float method is difficult to carry out in an economically depressed period. Bear markets
do cause insurers to shift away from investments and to toughen up
their underwriting standards, so a poor economy generally means high
insurance-premiums. This tendency to swing between profitable and
unprofitable periods over time is commonly known as the underwriting, or insurance, cycle.
Claims
Claims
and loss handling is the materialized utility of insurance; it is the
actual "product" paid for. Claims may be filed by insureds directly with
the insurer or through brokers or agents.
The insurer may require that the claim be filed on its own proprietary
forms, or may accept claims on a standard industry form, such as those
produced by ACORD.
Insurance-company claims departments employ a large number of claims adjusters, supported by a staff of records-management and data-entry clerks.
Incoming claims are classified based on severity and are assigned to
adjusters, whose settlement authority varies with their knowledge and
experience. An adjuster undertakes an investigation of each claim,
usually in close cooperation with the insured, determines if coverage is
available under the terms of the insurance contract (and if so, the
reasonable monetary value of the claim), and authorizes payment.
Policyholders may hire their own public adjusters
to negotiate settlements with the insurance company on their behalf.
For policies that are complicated, where claims may be complex, the
insured may take out a separate insurance-policy add-on, called
loss-recovery insurance, which covers the cost of a public adjuster in
the case of a claim.
Adjusting liability-insurance claims is particularly difficult because they involve a third party, the plaintiff, who is under no contractual obligation to cooperate with the insurer and may in fact regard the insurer as a deep pocket.
The adjuster must obtain legal counsel for the insured—either inside
("house") counsel or outside ("panel") counsel, monitor litigation that
may take years to complete, and appear in person or over the telephone
with settlement authority at a mandatory settlement-conference when
requested by a judge.
If a claims adjuster suspects under-insurance, the condition of average may come into play to limit the insurance company's exposure.
In managing the claims-handling function, insurers seek to
balance the elements of customer satisfaction, administrative handling
expenses, and claims overpayment leakages. In addition to this balancing
act, fraudulent insurance practices are a major business risk
that insurers must manage and overcome. Disputes between insurers and
insureds over the validity of claims or claims-handling practices
occasionally escalate into litigation (see insurance bad faith).
Marketing
Insurers will often use insurance agents to initially market or underwrite
their customers. Agents can be captive, meaning they write only for one
company, or independent, meaning that they can issue policies from
several companies. The existence and success of companies using
insurance agents is likely due to the availability of improved and
personalised services. Companies also use Broking firms, Banks and other
corporate entities (like Self Help Groups, Microfinance Institutions,
NGOs, etc.) to market their products.
Types
Any risk
that can be quantified can potentially be insured. Specific kinds of
risk that may give rise to claims are known as perils. An insurance
policy will set out in detail which perils are covered by the policy and
which are not. Below are non-exhaustive lists of the many different
types of insurance that exist. A single policy may cover risks in one or
more of the categories set out below. For example, vehicle insurance
would typically cover both the property risk (theft or damage to the
vehicle) and the liability risk (legal claims arising from an accident). A home insurance
policy in the United States typically includes coverage for damage to
the home and the owner's belongings, certain legal claims against the
owner, and even a small amount of coverage for medical expenses of
guests who are injured on the owner's property.
Business
insurance can take a number of different forms, such as the various
kinds of professional liability insurance, also called professional
indemnity (PI), which are discussed below under that name; and the business owner's policy
(BOP), which packages into one policy many of the kinds of coverage
that a business owner needs, in a way analogous to how homeowners'
insurance packages the coverages that a homeowner needs.
Vehicle insurance protects the policyholder against financial loss in
the event of an incident involving a vehicle they own, such as in a traffic collision.
Coverage typically includes:
Property coverage, for damage to or theft of the car
Liability coverage, for the legal responsibility to others for bodily injury or property damage
Medical coverage, for the cost of treating injuries, rehabilitation and sometimes lost wages and funeral expenses
Gap insurance covers the excess amount on an auto loan in an instance
where the policyholder's insurance company does not cover the entire
loan. Depending on the company's specific policies it might or might not
cover the deductible as well. This coverage is marketed for those who
put low down payments,
have high interest rates on their loans, and those with 60-month or
longer terms. Gap insurance is typically offered by a finance company
when the vehicle owner purchases their vehicle, but many auto insurance
companies offer this coverage to consumers as well.
Health insurance policies cover the cost of medical treatments.
Dental insurance, like medical insurance, protects policyholders for
dental costs. In most developed countries, all citizens receive some
health coverage from their governments, paid through taxation. In most
countries, health insurance is often part of an employer's benefits.
Income protection insurance
Workers' compensation, or employers' liability insurance, is compulsory in some countries.
Disability insurance
policies provide financial support in the event of the policyholder
becoming unable to work because of disabling illness or injury. It
provides monthly support to help pay such obligations as mortgage loans and credit cards.
Short-term and long-term disability policies are available to
individuals, but considering the expense, long-term policies are
generally obtained only by those with at least six-figure incomes, such
as doctors, lawyers, etc. Short-term disability insurance covers a
person for a period typically up to six months, paying a stipend each
month to cover medical bills and other necessities.
Long-term disability insurance covers an individual's expenses for
the long term, up until such time as they are considered permanently
disabled and thereafter Insurance companies will often try to encourage
the person back into employment in preference to and before declaring
them unable to work at all and therefore totally disabled.
Disability overhead insurance allows business owners to cover the overhead expenses of their business while they are unable to work.
Total permanent disability 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.
Workers' compensation insurance replaces all or part of a worker's wages lost and accompanying medical expenses incurred because of a job-related injury.
Casualty insurance insures against accidents, not necessarily tied to
any specific property. It is a broad spectrum of insurance that a
number of other types of insurance could be classified, such as auto,
workers compensation, and some liability insurances.
Crime insurance is a form of casualty insurance that covers the policyholder against losses arising from the criminal acts of third parties. For example, a company can obtain crime insurance to cover losses arising from theft or embezzlement.
Terrorism insurance provides protection against any loss or damage caused by terrorist activities. In the United States in the wake of 9/11, the Terrorism Risk Insurance Act
2002 (TRIA) set up a federal program providing a transparent system of
shared public and private compensation for insured losses resulting from
acts of terrorism. The program was extended until the end of 2014 by
the Terrorism Risk Insurance Program Reauthorization Act 2007 (TRIPRA).
Kidnap and ransom insurance
is designed to protect individuals and corporations operating in
high-risk areas around the world against the perils of kidnap,
extortion, wrongful detention and hijacking.
Political risk insurance is a form of casualty insurance that can be taken out by businesses with operations in countries in which there is a risk that revolution or other political conditions could result in a loss.
Life insurance provides a monetary benefit to a decedent's family or
other designated beneficiary, and may specifically provide for income to
an insured person's family, burial, funeral and other final expenses.
Life insurance policies often allow the option of having the proceeds
paid to the beneficiary either in a lump sum cash payment or an annuity. In most states, a person cannot purchase a policy on another person without their knowledge.
Annuities provide a stream of payments and are generally
classified as insurance because they are issued by insurance companies,
are regulated as insurance, and require the same kinds of actuarial and
investment management expertise that life insurance requires. 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 and, from an underwriting perspective,
are the mirror image of life insurance.
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 liquidatewealth when it is needed.
In many countries, such as the United States and the UK, the 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 the United States, the tax on interest income on life
insurance policies and annuities is generally deferred. However, in some
cases the benefit derived from tax deferral
may be offset by a low return. This depends upon the insuring company,
the type of policy and other variables (mortality, market return, etc.).
Moreover, other income tax saving vehicles (e.g., IRAs, 401(k) plans,
Roth IRAs) may be better alternatives for value accumulation.
Burial insurance
Burial insurance is an old type of life insurance which is paid out upon death to cover final expenses, such as the cost of a funeral. The Greeks and Romans introduced burial insurance c. 600 CE when they organized guilds
called "benevolent societies" which cared for the surviving families
and paid funeral expenses of members upon death. Guilds in the Middle Ages served a similar purpose, as did friendly societies during Victorian times.
Property insurance provides protection against risks to property, such as fire, theft or weather damage. This may include specialized forms of insurance such as fire insurance, flood insurance, earthquake insurance, home insurance, inland marine insurance or boiler insurance.
The term property insurance may, like casualty insurance, be used as a broad category of various subtypes of insurance, some of which are listed below:
Aviation insurance protects aircraft hulls and spares, and associated liability risks, such as passenger and third-party liability. Airports
may also appear under this subcategory, including air traffic control
and refuelling operations for international airports through to smaller
domestic exposures.
Boiler insurance
(also known as boiler and machinery insurance, or equipment breakdown
insurance) insures against accidental physical damage to boilers,
equipment or machinery.
Builder's risk insurance
insures against the risk of physical loss or damage to property during
construction. Builder's risk insurance is typically written on an "all
risk" basis covering damage arising from any cause (including the
negligence of the insured) not otherwise expressly excluded. Builder's
risk insurance is coverage that protects a person's or organization's
insurable interest in materials, fixtures or equipment being used in the
construction or renovation of a building or structure should those
items sustain physical loss or damage from an insured peril.
Crop insurance
may be purchased by farmers to reduce or manage various risks
associated with growing crops. Such risks include crop loss or damage
caused by weather, hail, drought, frost damage, pests (including especially insects), or disease—some of these being termed named perils. Index-based insurance
uses models of how climate extremes affect crop production to define
certain climate triggers that if surpassed have high probabilities of
causing substantial crop loss. When harvest losses occur associated with
exceeding the climate trigger threshold, the index-insured farmer is
entitled to a compensation payment.
Earthquake insurance is a form of property insurance that pays the policyholder in the event of an earthquake
that causes damage to the property. Most ordinary home insurance
policies do not cover earthquake damage. Earthquake insurance policies
generally feature a high deductible. Rates depend on location and hence the likelihood of an earthquake, as well as the construction of the home.
Fidelity bond
is a form of casualty insurance that covers policyholders for losses
incurred as a result of fraudulent acts by specified individuals. It
usually insures a business for losses caused by the dishonest acts of
its employees.
Hurricane Katrina caused over $80 billion of storm and flood damage.
Flood insurance
protects against property loss due to flooding. Many U.S. insurers do
not provide flood insurance in some parts of the country. In response to
this, the federal government created the National Flood Insurance Program which serves as the insurer of last resort.
Home insurance,
also commonly called hazard insurance or homeowners insurance (often
abbreviated in the real estate industry as HOI), provides coverage for
damage or destruction of the policyholder's home. In some geographical
areas, the policy may exclude certain types of risks, such as flood or
earthquake, that require additional coverage. Maintenance-related issues
are typically the homeowner's responsibility. The policy may include
inventory, or this can be bought as a separate policy, especially for
people who rent housing. In some countries, insurers offer a package
which may include liability and legal responsibility for injuries and
property damage caused by members of the household, including pets.
Landlord insurance
covers residential or commercial property that is rented to tenants. It
also covers the landlord's liability for the occupants at the property.
Most homeowners' insurance, meanwhile, cover only owner-occupied homes
and not liability or damages related to tenants.
Marine insurance and marine cargo insurance cover the loss or damage of vessels at sea or on inland waterways,
and of cargo in transit, regardless of the method of transit. When the
owner of the cargo and the carrier are separate corporations, marine
cargo insurance typically compensates the owner of cargo for losses
sustained from fire, shipwreck, etc., but excludes losses that can be
recovered from the carrier or the carrier's insurance. Many marine
insurance underwriters will include "time element" coverage in such
policies, which extends the indemnity to cover loss of profit and other
business expenses attributable to the delay caused by a covered loss.
Renters' insurance,
often called tenants' insurance, is an insurance policy that provides
some of the benefits of homeowners' insurance, but does not include
coverage for the dwelling, or structure, with the exception of small
alterations that a tenant makes to the structure.
Supplemental natural disaster insurance covers specified expenses
after a natural disaster renders the policyholder's home uninhabitable.
Periodic payments are made directly to the insured until the home is
rebuilt or a specified time period has elapsed.
Surety bond insurance is a three-party insurance guaranteeing the performance of the principal.
Liability insurance is a broad superset that covers legal claims
against the insured. Many types of insurance include an aspect of
liability coverage. For example, a homeowner's insurance policy will
normally include liability coverage which protects the insured in the
event of a claim brought by someone who slips and falls on the property;
automobile insurance also includes an aspect of liability insurance
that indemnifies against the harm that a crashing car can cause to
others' lives, health, or property. The protection offered by a
liability insurance policy is twofold: a legal defense in the event of a
lawsuit commenced against the policyholder and indemnification (payment
on behalf of the insured) with respect to a settlement or court
verdict. Liability policies typically cover only the negligence of the
insured, and will not apply to results of wilful or intentional acts by
the insured.
Public liability
insurance or general liability insurance covers a business or
organization against claims should its operations injure a member of the
public or damage their property in some way.
Directors and officers liability insurance
(D&O) protects an organization (usually a corporation) from costs
associated with litigation resulting from errors made by directors and
officers for which they are liable.
Environmental liability or environmental impairment insurance
protects the insured from bodily injury, property damage and cleanup
costs as a result of the dispersal, release or escape of pollutants.
Errors and omissions insurance
(E&O) is business liability insurance for professionals such as
insurance agents, real estate agents and brokers, architects,
third-party administrators (TPAs) and other business professionals.
Prize indemnity insurance
protects the insured from giving away a large prize at a specific
event. Examples would include offering prizes to contestants who can
make a half-court shot at a basketball game, or a hole-in-one at a golf tournament.
Professional liability insurance, also called professional indemnity insurance
(PI), protects insured professionals such as architectural corporations
and medical practitioners against potential negligence claims made by
their patients/clients. Professional liability insurance may take on
different names depending on the profession. For example, professional
liability insurance in reference to the medical profession may be called
medical malpractice insurance.
Often a commercial insured's liability insurance program consists of
several layers. The first layer of insurance generally consists of
primary insurance, which provides first dollar indemnity for judgments
and settlements up to the limits of liability of the primary policy.
Generally, primary insurance is subject to a deductible and obligates
the insurer to defend the insured against lawsuits, which is normally
accomplished by assigning counsel to defend the insured. In many
instances, a commercial insured may elect to self-insure. Above the
primary insurance or self-insured retention, the insured may have one or
more layers of excess insurance to provide coverage additional limits
of indemnity protection. There are a variety of types of excess
insurance, including "stand-alone" excess policies (policies that
contain their own terms, conditions, and exclusions), "follow form"
excess insurance (policies that follow the terms of the underlying
policy except as specifically provided), and "umbrella" insurance
policies (excess insurance that in some circumstances could provide
coverage that is broader than the underlying insurance).
Credit insurance repays some or all of a loan when the borrower is insolvent.
Mortgage insurance
insures the lender against default by the borrower. Mortgage insurance
is a form of credit insurance, although the name "credit insurance" more
often is used to refer to policies that cover other kinds of debt.
Many credit cards offer payment protection plans which are a form of credit insurance.
Trade credit insurance
is business insurance over the accounts receivable of the insured. The
policy pays the policy holder for covered accounts receivable if the
debtor defaults on payment.
Collateral protection insurance (CPI) insures property (primarily vehicles) held as collateral for loans made by lending institutions.
Cyber attack insurance
Cyber-insurance is a business lines insurance product intended to provide coverage to corporations from Internet-based risks, and more generally from risks relating to information technology infrastructure, information privacy, information governance liability, and activities related thereto.
Other types
All-risk insurance
is an insurance that covers a wide range of incidents and perils,
except those noted in the policy. All-risk insurance is different from
peril-specific insurance that cover losses from only those perils listed
in the policy. In car insurance, all-risk policy includes also the damages caused by the own driver.
High-value horses may be insured under a bloodstock policy.
Bloodstock insurance covers individual horses
or a number of horses under common ownership. Coverage is typically for
mortality as a result of accident, illness or disease but may extend to
include infertility, in-transit loss, veterinary fees, and prospective
foal.
Business interruption insurance covers the loss of income, and the expenses incurred, after a covered peril interrupts normal business operations.
Defense Base Act
(DBA) insurance provides coverage for civilian workers hired by the
government to perform contracts outside the United States and Canada.
DBA is required for all U.S. citizens, U.S. residents, U.S. Green Card
holders, and all employees or subcontractors hired on overseas
government contracts. Depending on the country, foreign nationals must
also be covered under DBA. This coverage typically includes expenses
related to medical treatment and loss of wages, as well as disability
and death benefits.
Expatriate insurance
provides individuals and organizations operating outside of their home
country with protection for automobiles, property, health, liability and
business pursuits.
Hired-in Plant Insurance covers liability where, under a contract of hire, the customer is liable to pay for the cost of hired-in equipment and for any rental charges due to a plant hire firm, such as construction plant and machinery.
Legal expenses insurance
covers policyholders for the potential costs of legal action against an
institution or an individual. When something happens which triggers the
need for legal action, it is known as "the event". There are two main
types of legal expenses insurance: before the event insurance and after the event insurance.
Livestock insurance is a specialist policy provided to, for example,
commercial or hobby farms, aquariums, fish farms or any other animal
holding. Cover is available for mortality or economic slaughter as a
result of accident, illness or disease but can extend to include
destruction by government order.
Media liability insurance is designed to cover professionals that
engage in film and television production and print, against risks such
as defamation.
Over-redemption insurance
is purchased by businesses to protect themselves financially in the
event that a promotion ends up becoming more successful than was
originally anticipated and/or budgeted for.
Pet insurance insures pets against accidents and illnesses; some companies cover routine/wellness care and burial, as well.
Pollution insurance
usually takes the form of first-party coverage for contamination of
insured property either by external or on-site sources. Coverage is also
afforded for liability to third parties arising from contamination of
air, water, or land due to the sudden and accidental release of
hazardous materials from the insured site. The policy usually covers the
costs of cleanup and may include coverage for releases from underground
storage tanks. Intentional acts are specifically excluded.
Purchase insurance is aimed at providing protection on the products
people purchase. Purchase insurance can cover individual purchase
protection, warranties, guarantees,
care plans and even mobile phone insurance. Such insurance is normally
limited in the scope of problems that are covered by the policy.
Tax insurance is increasingly being used in corporate transactions
to protect taxpayers in the event that a tax position it has taken is
challenged by the IRS or a state, local, or foreign taxing authority
Title insurance provides a guarantee that title to real property is vested in the purchaser or mortgagee, free and clear of liens or encumbrances. It is usually issued in conjunction with a search of the public records performed 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, loss of personal belongings,
travel delay, and personal liabilities.
Tuition insurance insures students against involuntary withdrawal from cost-intensive educational institutions
Interest rate insurance protects the holder from adverse changes in interest rates, for instance for those with a variable rate loan or mortgage
Divorce insurance is a form of contractual liability insurance that
pays the insured a cash benefit if their marriage ends in divorce.
Insurance financing vehicles
Fraternal insurance is provided on a cooperative basis by fraternal benefit societies or other social organizations.
No-fault insurance
is a type of insurance policy (typically automobile insurance) where
insureds are indemnified by their own insurer regardless of fault in the
incident.
Protected self-insurance is an alternative risk financing mechanism
in which an organization retains the mathematically calculated cost of
risk within the organization and transfers the catastrophic risk with
specific and aggregate limits to an insurer so the maximum total cost of
the program is known. A properly designed and underwritten Protected
Self-Insurance Program reduces and stabilizes the cost of insurance and
provides valuable risk management information.
Retrospectively rated insurance is a method of establishing a
premium on large commercial accounts. The final premium is based on the
insured's actual loss experience during the policy term, sometimes
subject to a minimum and maximum premium, with the final premium
determined by a formula. Under this plan, the current year's premium is
based partially (or wholly) on the current year's losses, although the
premium adjustments may take months or years beyond the current year's
expiration date. The rating formula is guaranteed in the insurance
contract. Formula: retrospective premium = converted loss + basic
premium × tax multiplier. Numerous variations of this formula have been
developed and are in use.
Formal self-insurance (active risk retention) is the deliberate decision to pay for otherwise insurable losses out of one's own money.
This can be done on a formal basis by establishing a separate fund into
which funds are deposited on a periodic basis, or by simply forgoing
the purchase of available insurance and paying out-of-pocket.
Self-insurance is usually used to pay for high-frequency, low-severity
losses.
Such losses, if covered by conventional insurance, mean having to pay a
premium that includes loadings for the company's general expenses, cost
of putting the policy on the books, acquisition expenses, premium
taxes, and contingencies. While this is true for all insurance, for
small, frequent losses the transaction costs may exceed the benefit of
volatility reduction that insurance otherwise affords.
Reinsurance is a type of insurance purchased by insurance companies or self-insured employers to protect against unexpected losses. Financial reinsurance is a form of reinsurance that is primarily used for capital management rather than to transfer insurance risk.
Social insurance
can be many things to many people in many countries. But a summary of
its essence is that it is a collection of insurance coverages (including
components of life insurance, disability income insurance, unemployment
insurance, health insurance, and others), plus retirement savings, that
requires participation by all citizens. By forcing everyone in society
to be a policyholder and pay premiums, it ensures that everyone can
become a claimant when or if they need to. Along the way, this
inevitably becomes related to other concepts such as the justice system
and the welfare state.
This is a large, complicated topic that engenders tremendous debate,
which can be further studied in the following articles (and others):
Stop-loss insurance
provides protection against catastrophic or unpredictable losses. It is
purchased by organizations who do not want to assume 100% of the
liability for losses arising from the plans. Under a stop-loss policy,
the insurance company becomes liable for losses that exceed certain
limits called deductibles.
Closed community and governmental self-insurance
Some
communities prefer to create virtual insurance among themselves by
other means than contractual risk transfer, which assigns explicit
numerical values to risk. A number of religious groups, including the Amish and some Muslim groups, depend on support provided by their communities when disasters
strike. The risk presented by any given person is assumed collectively
by the community who all bear the cost of rebuilding lost property and
supporting people whose needs are suddenly greater after a loss of some
kind. In supportive communities where others can be trusted to follow
community leaders, this tacit form of insurance can work. In this manner
the community can even out the extreme differences in insurability that
exist among its members. Some further justification is also provided by
invoking the moral hazard of explicit insurance contracts.
In the United Kingdom, The Crown (which, for practical purposes, meant the civil service)
did not insure property such as government buildings. If a government
building was damaged, the cost of repair would be met from public funds
because, in the long run, this was cheaper than paying insurance
premiums. Since many UK government buildings have been sold to property
companies and rented back, this arrangement is now less common.
In the United States, the most prevalent form of self-insurance
is governmental risk management pools. They are self-funded
cooperatives, operating as carriers of coverage for the majority of
governmental entities today, such as county governments, municipalities,
and school districts. Rather than these entities independently
self-insure and risk bankruptcy from a large judgment or catastrophic
loss, such governmental entities form a risk pool.
Such pools begin their operations by capitalization through member
deposits or bond issuance. Coverage (such as general liability, auto
liability, professional liability, workers compensation, and property)
is offered by the pool to its members, similar to coverage offered by
insurance companies. However, self-insured pools offer members lower
rates (due to not needing insurance brokers), increased benefits (such
as loss prevention services) and subject matter expertise. Of
approximately 91,000 distinct governmental entities operating in the
United States, 75,000 are members of self-insured pools in various lines
of coverage, forming approximately 500 pools. Although a relatively
small corner of the insurance market, the annual contributions
(self-insured premiums) to such pools have been estimated up to 17
billion dollars annually.
Insurance companies
Certificate issued by Republic Fire Insurance Co. of New York c. 1860
Insurance companies may provide any combination of insurance types, but are often classified into three groups:
Life insurance companies, that provide life insurance, annuities and pensions products and bear similarities to asset management businesses
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 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.
Insurance companies are commonly classified as either mutual or proprietary companies.
Mutual companies are owned by the policyholders, while shareholders
(who may or may not own policies) own proprietary insurance companies.
Demutualization
of mutual insurers to form stock companies, as well as the formation of
a hybrid known as a mutual holding company, became common in some
countries, such as the United States, in the late 20th century. However,
not all states permit mutual holding companies.
Reinsurance companies
Reinsurance
companies are insurance companies that provide policies to other
insurance companies, allowing them to reduce their risks and protect
themselves from substantial losses.
The reinsurance market is dominated by a few large companies with huge
reserves. A reinsurer may also be a direct writer of insurance risks as
well.
Captive insurance
companies can 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% 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 product 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 or loss control efforts
Other forms
Other possible forms for an insurance company include reciprocals, in which policyholders reciprocate in sharing risks, and Lloyd's organizations.
Admitted versus non-admitted
Admitted
insurance companies are those in the United States that have been
admitted or licensed by the state licensing agency. The insurance they
provide is called admitted insurance. Non-admitted companies have
not been approved by the state licensing agency, but are allowed to
provide insurance under special circumstances when they meet an
insurance need that admitted companies cannot or will not meet.
Insurance consultants
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 among many companies. Similar to an
insurance consultant, an "insurance broker" also shops around for the
best insurance policy among 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.
Financial stability and rating
The
financial stability and strength of an insurance company is a
consideration when buying an insurance contract. An insurance premium
paid currently provides coverage for losses that might arise many years
in the future. For that reason, a more financially stable insurance
carrier reduces the risk of the insurance company becoming insolvent,
leaving their policyholders with no coverage (or coverage only from a
government-backed insurance pool or other arrangements with less
attractive payouts for losses). A number of independent rating agencies
provide information and rate the financial viability of insurance
companies.
Insurance companies are rated by various agencies such as AM 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.
Across the world
Advanced economies account for the bulk of the global insurance industry. According to Swiss Re, the global insurance market wrote $6.287 trillion in direct premiums in 2020.
("Direct premiums" means premiums written directly by insurers before
accounting for ceding of risk to reinsurers.) As usual, the United
States was the country with the largest insurance market with $2.530
trillion (40.3%) of direct premiums written, with the People's Republic
of China coming in second at only $574 billion (9.3%), Japan coming in
third at $438 billion (7.1%), and the United Kingdom coming in fourth at
$380 billion (6.2%). However, the European Union's single market is the actual second largest market, with 18 percent market share.
In the United States, insurance is regulated by the states under the McCarran–Ferguson Act, with "periodic proposals for federal intervention", and a nonprofit coalition of state insurance agencies called the National Association of Insurance Commissioners works to harmonize the country's different laws and regulations. The National Conference of Insurance Legislators (NCOIL) also works to harmonize the different state laws.
In the European Union,
the Third Non-Life Directive and the Third Life Directive, both passed
in 1992 and effective 1994, created a single insurance market in Europe
and allowed insurance companies to offer insurance anywhere in the EU
(subject to permission from authority in the head office) and allowed
insurance consumers to purchase insurance from any insurer in the EU. As far as insurance in the United Kingdom, the Financial Services Authority took over insurance regulation from the General Insurance Standards Council in 2005; laws passed include the Insurance Companies Act 1973 and another in 1982, and reforms to warranty and other aspects under discussion as of 2012.
The insurance industry in China was nationalized in 1949 and thereafter offered by only a single state-owned company, the People's Insurance Company of China,
which was eventually suspended as demand declined in a communist
environment. In 1978, market reforms led to an increase in the market
and by 1995 a comprehensive Insurance Law of the People's Republic of
China was passed, followed in 1998 by the formation of China Insurance Regulatory Commission (CIRC), which has broad regulatory authority over the insurance market of China.
In India IRDA is insurance regulatory authority. As per the
section 4 of IRDA Act 1999, Insurance Regulatory and Development
Authority (IRDA), which was constituted by an act of parliament.
National Insurance Academy, Pune is apex insurance capacity builder
institute promoted with support from Ministry of Finance and by LIC,
Life & General Insurance companies.
In 2017, within the framework of the joint project of the Bank of Russia and Yandex, a special check mark
(a green circle with a tick and 'Реестр ЦБ РФ' (Unified state register
of insurance entities) text box) appeared in the search for Yandex
system, informing the consumer that the company's financial services are
offered on the marked website, which has the status of an insurance
company, a broker or a mutual insurance association.
Controversies
Does not reduce the risk
Insurance
is just a risk transfer mechanism wherein the financial burden which
may arise due to some fortuitous event is transferred to a bigger entity
(i.e., an insurance company) by way of paying premiums. This only
reduces the financial burden and not the actual chances of happening of
an event. Insurance is a risk for both the insurance company and the
insured. The insurance company understands the risk involved and will
perform a risk assessment when writing the policy.
As a result, the premiums may go up if they determine that the
policyholder will file a claim. However, premiums might reduce if the
policyholder commits to a risk management program as recommended by the
insurer.
It is therefore important that insurers view risk management as a joint
initiative between policyholder and insurer since a robust risk
management plan minimizes the possibility of a large claim for the
insurer while stabilizing or reducing premiums for the policyholder.
If a person is financially stable and plans for life's unexpected
events, they may be able to go without insurance. However, they must
have enough to cover a total and complete loss of employment and of
their possessions. Some states will accept a surety bond, a government
bond, or even making a cash deposit with the state.
Moral hazard
An
insurance company may inadvertently find that its insureds may not be
as risk-averse as they might otherwise be (since, by definition, the
insured has transferred the risk to the insurer), a concept known as moral hazard.
This 'insulates' many from the true costs of living with risk, negating
measures that can mitigate or adapt to risk and leading some to
describe insurance schemes as potentially maladaptive.
Complexity of insurance policy contracts
9/11 was a major insurance loss, but there were disputes over the World Trade Center's insurance policy.
Insurance policies can be complex and some policyholders may not
understand all the fees and coverages included in a policy. As a result,
people may buy policies on unfavorable terms. In response to these
issues, many countries have enacted detailed statutory and regulatory
regimes governing every aspect of the insurance business, including
minimum standards for policies and the ways in which they may be advertised and sold.
For example, most insurance policies in the English language today have been carefully drafted in plain English;
the industry learned the hard way that many courts will not enforce
policies against insureds when the judges themselves cannot understand
what the policies are saying. Typically, courts construe ambiguities in
insurance policies against the insurance company and in favor of
coverage under the policy.
Many institutional insurance purchasers buy insurance through an
insurance broker. While on the surface it appears the broker represents
the buyer (not the insurance company), and typically counsels the buyer
on appropriate coverage and policy limitations, in the vast majority of
cases a broker's compensation comes in the form of a commission as a
percentage of the insurance premium, creating a conflict of interest in
that the broker's financial interest is tilted toward encouraging an
insured to purchase more insurance than might be necessary at a higher
price. A broker generally holds contracts with many insurers, thereby
allowing the broker to "shop" the market for the best rates and coverage possible.
Insurance may also be purchased through an agent. A tied agent,
working exclusively with one insurer, represents the insurance company
from whom the policyholder buys (while a free agent sells policies of
various insurance companies). Just as there is a potential conflict of
interest with a broker, an agent has a different type of conflict.
Because agents work directly for the insurance company, if there is a
claim the agent may advise the client to the benefit of the insurance
company. Agents generally cannot offer as broad a range of selection
compared to an insurance broker.
An independent insurance consultant advises insureds on a
fee-for-service retainer, similar to an attorney, and thus offers
completely independent advice, free of the financial conflict of
interest of brokers or agents. However, such a consultant must still
work through brokers or agents in order to secure coverage for their
clients.
Limited consumer benefits
In
the United States, economists and consumer advocates generally consider
insurance to be worthwhile for low-probability, catastrophic losses,
but not for high-probability, small losses. Because of this, consumers
are advised to select high deductibles
and to not insure losses which would not cause a disruption in their
life. However, consumers have shown a tendency to prefer low deductibles
and to prefer to insure relatively high-probability, small losses over
low-probability, perhaps due to not understanding or ignoring the
low-probability risk. This is associated with reduced purchasing of
insurance against low-probability losses, and may result in increased
inefficiencies from moral hazard.
Redlining
is the practice of denying insurance coverage in specific geographic
areas, supposedly because of a high likelihood of loss, while the
alleged motivation is unlawful discrimination. Racial profiling or redlining
has a long history in the property insurance industry in the United
States. From a review of industry underwriting and marketing materials,
court documents, and research by government agencies, industry and
community groups, and academics, it is clear that race has long affected
and continues to affect the policies and practices of the insurance
industry.
In July 2007, the US Federal Trade Commission (FTC) released a report presenting the results of a study concerning credit-based insurance scores
in automobile insurance. The study found that these scores are
effective predictors of risk. It also showed that African-Americans and
Hispanics are substantially overrepresented in the lowest credit scores,
and substantially underrepresented in the highest, while Caucasians and
Asians are more evenly spread across the scores. The credit scores were
also found to predict risk within each of the ethnic groups, leading
the FTC to conclude that the scoring models are not solely proxies for
redlining. The FTC indicated little data was available to evaluate
benefit of insurance scores to consumers. The report was disputed by representatives of the Consumer Federation of America, the National Fair Housing Alliance, the National Consumer Law Center, and the Center for Economic Justice, for relying on data provided by the insurance industry.
All states have provisions in their rate regulation laws or in
their fair trade practice acts that prohibit unfair discrimination,
often called redlining, in setting rates and making insurance available.
In determining premiums and premium rate structures, insurers consider quantifiable factors, including location, credit scores, gender, occupation, marital status, and education level. However, the use of such factors is often considered to be unfair or unlawfully discriminatory,
and the reaction against this practice has in some instances led to
political disputes about the ways in which insurers determine premiums
and regulatory intervention to limit the factors used.
An insurance underwriter's job is to evaluate a given risk as to
the likelihood that a loss will occur. Any factor that causes a greater
likelihood of loss should theoretically be charged a higher rate. This
basic principle of insurance must be followed if insurance companies are
to remain solvent.
Thus, "discrimination" against (i.e., negative differential treatment
of) potential insureds in the risk evaluation and premium-setting
process is a necessary by-product of the fundamentals of insurance
underwriting.
For instance, insurers charge older people significantly higher
premiums than they charge younger people for term life insurance. Older
people are thus treated differently from younger people (i.e., a
distinction is made, discrimination occurs). The rationale for the
differential treatment goes to the heart of the risk a life insurer
takes: older people are likely to die sooner than young people, so the
risk of loss (the insured's death) is greater in any given period of
time and therefore the risk premium must be higher to cover the greater risk. However, treating insureds differently when there is no actuarially sound reason for doing so is unlawful discrimination.
A recent example of a new insurance product that is patented is Usage Basedauto insurance. Early versions were independently invented and patented by a major US auto insurance company, Progressive Auto Insurance (U.S. Patent 5,797,134) and a Spanish independent inventor, Salvador Minguijon Perez.
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, recently had to pay $80 million to an
independent inventor, Bancorp Services, in order to settle a patent
infringement and theft of trade secret lawsuit for a 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. The rate at
which patents have been issued has steadily risen from 15 in 2002 to 44
in 2006.
The first insurance patent to be granted was including another example of an application posted was.
It was posted on 6 March 2009. This patent application describes a
method for increasing the ease of changing insurance companies.
Insurance on demand
Insurance
on demand (also IoD) is an insurance service that provides clients with
insurance protection when they need, i.e. only episodic rather than on 24/7
basis as typically provided by traditional insurers (e.g. clients can
purchase an insurance for one single flight rather than a longer-lasting
travel insurance plan).
Insurance industry and rent-seeking
Certain insurance products and practices have been described as rent-seeking by critics.
That is, some insurance products or practices are useful primarily
because of legal benefits, such as reducing taxes, as opposed to
providing protection against risks of adverse events.
Religious concerns
Muslim
scholars have varying opinions about life insurance. Life insurance
policies that earn interest (or guaranteed bonus/NAV) are generally
considered to be a form of riba (usury) and some consider even policies that do not earn interest to be a form of gharar (speculation). Some argue that gharar is not present due to the actuarial science behind the underwriting.
Jewish rabbinical scholars also have expressed reservations regarding
insurance as an avoidance of God's will but most find it acceptable in
moderation.
Some Christians believe insurance represents a lack of faith and there is a long history of resistance to commercial insurance in Anabaptist communities (Mennonites, Amish, Hutterites, Brethren in Christ) but many participate in community-based self-insurance programs that spread risk within their communities.
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