Insurers' business model

Underwriting and investing

The business model can be reduced to a simple equation: Profit = earned premium + investment income - incurred loss - underwriting expenses.

Insurers make money in two ways: (1) 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 (2) by investing the premiums they collect from insured parties.

The most complicated aspect of the insurance business is the underwriting of policies. Using a wide assortment of data, insurers predict the likelihood that a claim will be made against their policies and price products accordingly. To this end, insurers use actuarial science to quantify the risks they are willing to assume and the premium they will charge to assume them. Data is analyzed to fairly accurately project the rate of future claims based on a given risk. 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 an insurer's overall exposure. Upon termination of a given policy, the amount of premium collected and the investment gains thereon minus the amount paid out in claims is the insurer's underwriting profit on that policy. Of course, from the insurer's perspective, some policies are "winners" (i.e., the insurer pays out less in claims and expenses than it receives in premiums and investment income) and some are "losers" (i.e., the insurer pays out more in claims and expenses than it receives in premiums and investment income); insurance companies essentially use actuarial science to attempt to underwrite enough "winning" policies to pay out on the "losers" while still maintaining profitability.

An insurer's underwriting performance is measured in its combined ratio. The loss ratio (incurred losses and loss-adjustment expenses divided by net earned premium) is added to the expense ratio (underwriting expenses divided by net premium written) to determine the company's combined ratio. The combined ratio is a reflection of the company's overall underwriting profitability. A combined ratio of less than 100 percent indicates underwriting profitability, while anything over 100 indicates an underwriting loss.

Insurance companies also earn investment profits on “float”. “Float” or available reserve is the amount of money, at hand at any given moment, that an insurer has collected in insurance premiums but has not been paid out in claims. Insurers start investing insurance premiums as soon as they are collected and continue to earn interest on them until claims are paid out. The Association of British Insurers (gathering 400 insurance companies and 94% of UK insurance services) has almost 20% of the investments in the London Stock Exchange.[6]

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 forever possible to sustain a profit from float without an underwriting profit as well, but this opinion is not universally held. 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. [7]

Property and casualty insurers currently make the most money from their auto insurance line of business. Generally better statistics are available on auto losses and underwriting on this line of business has benefited greatly from advances in computing. Additionally, property losses in the United States, due to unpredictable natural catastrophes, have exacerbated this trend.

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Claims In Insurance

Finally, claims and loss handling is the materialized utility of insurance; it is the actual "product" paid for, though one hopes it will never need to be used. 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 claim 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. The adjuster undertakes a thorough investigation of each claim, usually in close cooperation with the insured, determines its reasonable monetary value, and authorizes payment. Adjusting liability insurance claims is particularly difficult because there is a third party involved (the plaintiff who is suing the insured) who is under no contractual obligation to cooperate with the insurer and in fact may 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 the judge.

In managing the claims handling function, insurers seek to balance the elements of customer satisfaction, administrative handling expenses, and claims overpayment leakages. As part of this balancing act, fraudulent insurance practices are a major business risk that must be managed and overcome. Disputes between insurers and insureds over the validity of claims or claims handling practices occasionally escalate into litigation; see insurance bad faith.

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Auto insurance

Auto insurance protects you against financial loss if you have an accident. It is a contract between you and the insurance company. You agree to pay the premium and the insurance company agrees to pay your losses as defined in your policy. Auto insurance provides property, liability and medical coverage:

1. Property coverage pays for damage to or theft of your car.
2. Liability coverage pays for your legal responsibility to others for bodily injury or property damage.
3. Medical coverage pays for the cost of treating injuries, rehabilitation and sometimes lost wages and funeral expenses.

An auto insurance policy comprises six kinds of coverage. Most countries require you to buy some, but not all, of these coverages. If you're financing a car, your lender may also have requirements. Most auto policies are for six months to a year.

In the United States, your insurance company should notify you by mail when it’s time to renew the policy and to pay your premium.

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Home insurance

Home insurance provides compensation for damage or destruction of a home from disasters. In some geographical areas, the standard insurances excludes certain types of disasters, such as flood and earthquakes, that require additional coverage. Maintenance-related problems are the homeowners' 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.

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Health Insurance

Health insurance policies by the National Health Service in the United Kingdom (NHS) or other publicly-funded health programs will cover the cost of medical treatments. Dental insurance, like medical insurance, is coverage for individuals to protect them against dental costs. In the U.S., dental insurance is often part of an employer's benefits package, along with health insurance.

Disability

* Disability insurance policies provide financial support in the event the policyholder is unable to work because of disabling illness or injury. It provides monthly support to help pay such obligations as mortgages and credit cards.
* 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.

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Casualty insurance

Casualty insurance insures against accidents, not necessarily tied to any specific property.

* 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.
* 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 will result in a loss.

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life insurance

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.

Annuities provide a stream of payments and are generally classified as insurance because they are issued by insurance companies and 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 liquidate wealth when it is needed.

In many countries, such as the U.S. 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 U.S., 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. A combination of low-cost term life insurance and a higher-return tax-efficient retirement account may achieve better investment return.

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Liability insurance

Liability insurance is a very 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.

* Directors and officers liability insurance protects an organization (usually a corporation) from costs associated with litigation resulting from mistakes made by directors and officers for which they are liable. In the industry, it is usually called "D&O" for short.
* Environmental liability 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: See "Professional liability insurance" under "Liability insurance".
* 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, protects insured professionals such as architectural corporation and medical practice 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 malpractice insurance. Notaries public may take out errors and omissions insurance (E&O). Other potential E&O policyholders include, for example, real estate brokers, Insurance agents, home inspectors, appraisers, and website developersinspectors, appraisers, and website developers

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Credit insurance

Credit insurance repays some or all of a loan when certain things happen to the borrower such as unemployment, disability, or death.

* 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.

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Insurance financing vehicles

* Fraternal insurance is provided on a cooperative basis by fraternal benefit societies or other social organizations.[13]
* 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 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 he/she needs 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):
o National Insurance
o Social safety net
o Social security
o Social Security debate (United States)
o Social Security (United States)
o Social welfare provision
* 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.

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Closed community self-insurance

Some communities prefer to create virtual insurance amongst 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 and may have disappeared altogether

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US Insurance Companies

* Affirmative Insurance Company
* American Access Insurance Company
* American National Insurance Company
* American Automobile Association
* AIG
* Allstate
* American Family Insurance
* American Farmers and Ranchers Mutual (formerly Oklahoma Farmers Union Mututal)
* Amica
* Arbella
* Assurant Employee Benefits
* Auto-Owners Insurance
* California Casualty Insurance
* CapitalOne
* Colonial Life
* Commerce Insurance Group
* COUNTRY Financial
* Cuna Mutual Group
* Electric Insurance Company
* Encompass
* Esurance
* Expatriate Insurance
* Farm Bureau Insurance
* Farmers Insurance
* Frankenmuth Mutual Insurance Company
* GAINSCO Auto Insurance
* GMAC Insurance
* GEICO
* GuideOne
* Hanover Insurance
* The Hartford
* Hastings Mutual Insurance Company
* Haulers Insurance Company
* The Horace Mann Companies
* Infinity Auto Insurance Company
* Liberty Mutual
* Nationwide Insurance
* National Interstate
* Merchants Insurance Group
* Metropolitan Life Insurance Company
* Membercare Insurance
* Monumental Life Insurance Company
* Mutual of America Life Insurance Company
* Mutual of Enumclaw
* OneBeacon Insurance Group
* Pekin Insurance
* Pemco
* Principal Financial Group
* Progressive
* Prudential Financial
* Safeco
* Safeway Insurance Group
* Selective
* Standard Insurance Company
* State Auto Insurance Companies
* Shelter Insurance Companies
* Solid Insurance Group
* State Farm Mutual Automobile Insurance Company
* The Travelers Companies, Inc.
* Trustgard Insurance
* Unitrin Direct Auto Insurance
* USAA
* Wawanesa (California)
* Westfield Insurance

Disability Insurance

* American Family Insurance
* Aflac
* Assurant Employee Benefits
* Colonial Life
* Mutual of America
* Principal Financial Group
* Standard Insurance Company
* Unum
* Berkshire Life
* MetLife


Expatriate Insurance


* Clements International

General Liability Insurance

* American Family Insurance
* Allstate Insurance Company

Health Insurance

* American National Insurance Company
* Aetna
* Alliant Health Plans
* Allstate Insurance Company
* American Family Insurance
* American Medical Security Life Insurance Company
* Anthem
* Assurant
* Asuris Northwest Health
* Beech Street
* Blue Cross and Blue Shield Association
* Celtic Insurance Co.
* CIGNA
* CLEAR CHOICE HEALTH PLANS
* COMMUNITY HEALTH PLAN OF WASHINGTON
* community first
* Coventry Health care
* Continental General
* Fox insurance company
* Fortis
* Golden Rule Insurance Company
* Group Health Inc.
* Group Health Cooperative
* Harvard Community Health Plan
* HealthMarkets
* Health Net of Arizona
* Health Net of Oregon
* HealthPartners
* Health Plan of Nevada
* Humana Inc.
* Insurance Services of America
* Intermountain Health Care
* Kaiser Permanente
* LifeWise Health Plan of Arizona
* LifeWise Health Plan of Oregon
* LifeWise Health Plan of Washington
* Medica of Minnesota
* Medical Mutual
* Membercare Insurance
* Oxford Health Plans, Inc.
* Principal Financial Group
* Shelter Insurance Companies
* UNICARE
* UnitedHealthCare (UnitedHealth recently purchased Pacificare & United Medical Resources)
* Vista Healthplan of South Florida
* Wellpoint
* World Insurance
* College Health IPA
* Acordia National
* [(American Association of Retired Persons)]

Life Insurance

* AAA d.b.a. Western United
* AAA Life Insurance Company
* Aetna
* Aflac
* AIG American General
* Alfa Life Insurance
* Allstate Insurance Company
* American Family Insurance
* American Farmers and Ranchers
* American International Group
* American National Insurance Company
* Ameritas Life Insurance
* Aon Corporation, formerly known as Combined Insurance Company of America
* Assurant Employee Benefits
* Auto-Owners Insurance
* AXA
* Bankers Life and Casualty Company
* Banner Life
* The Chesapeake Life Insurance Company
* Colonial Life
* COUNTRY Financial
* Farm Bureau Insurance
* Farmers Insurance
* First Investors Life Insurance Company
* First United American Life Insurance Company
* Foresters
* Horace Mann Life Insurance Company
* Garden State Life Insurance Company
* Globe Life And Accident Insurance Company
* Guardian Life Insurance Company of America
* Jackson National Life
* John Hancock Insurance, now a unit of Manulife Financial
* The Hartford
* Kansas City Life Insurance Company, Inc.
* Lafayette Life Insurance Company
* Liberty NationalLife Insurance Company
* Lincoln Financial Group
* Mass Mutual Financial Group
* MEGA Life and Health Insurance
* Metropolitan Life Insurance Company
* Minnesota Life Insurance Company
* Modern Woodmen of America
* Monumental Life Insurance Company
* Nationwide Insurance
* National Western Life
* New York Life
* Northwestern Mutual Life Insurance Company
* Old Mutual
* Pacific Life Insurance
* Primerica Life Insurance Company
* Principal Financial Group
* Protective Life Corporation
* Prudential Financial
* RBC
* Sagicor USA, Inc., formerly known as American Founders Life
* Shenandoah
* The Standard (Also known as Standard Insurance Company)
* Shelter Life Insurance Company
* State Farm Insurance
* Thrivent Financial for Lutherans, product of merger between Lutheran Brotherhood & Aid Association for Lutherans
* Travelers Group, now somewhat part of Citigroup, other parts belong to The Travelers Companies, Inc.
* Union Central
* USAA
* West Coast[disambiguation needed]
* Western & Southern
* Western Reserve Life

Supplemental Insurance

* Aflac -Cancer, Accident Indemnity, Hospital Indemnity, Dental, Medicare Supplement, Vision, Intensive Care, Short-Term Disability, Group Short-Term Disability, Long Term Care, Life
* Colonial Life - Typical plans include disability, accident, life, cancer and hospital confinement insurance.

Pet Insurance


The following have as their primary business pet health insurance:

* PurinaCare Pet Health Insurance
* ASPCA Pet Health Insurance
* Pets Health Plan
* Hartville Pet Insurance
* PetCare
* Global Pet Insurance
* Pets Best Pet Insurance
* Veterinary Pet Insurance
* Embrace Pet Insurance
* Petplan USA Pet Insurance
* PetFirst Healthcare Pet Insurance
* Trupanion Pet Health Insurance

Property and Casualty Insurance

* ACE USA
* Acuity
* Advent Risk Consultants
* Allstate
* Alfa Mutual Insurance
* American Bankers Insurance Company of Florida
* American Family Insurance
* American National Property and Casualty
* American International Group
* Assurant Specialty Property
* Argonaut Group, Inc.
* Auto-Owners Insurance
* Balboa Insurance
* BISYS Commercial Insurance Services, Inc.
* Bliss & Glennon, Inc.
* Chubb Corporation
* Church Mutual
* Cincinnati Financial Corporation
* Commerce Insurance Group
* CNA Financial Corporation
* COUNTRY Financial
* Farm Bureau Insurance
* Farmers Insurance
* Fireman's Fund Insurance Company
* FM Global
* Frankenmuth Mutual Insurance Company
* Great American Insurance Company
* Hanover Insurance
* The Hartford
* Hastings Mutual Insurance Company
* Harleysville Insurance Company
* Horace Mann Companies
* Infinity Property & Casualty
* Liberty Mutual
* Manulife Financial
* Markel Corporation
* Mercury Insurance Group
* Merchants Insurance Group
* Michigan Millers Mutual Insurance Company
* Nationwide Insurance
* NLC Insurance Companies
* OneBeacon Insurance Group
* Penn National Insurance
* Philadelphia Insurance
* The Travelers Companies, Inc.
* Safeway Insurance Group
* Secura
* Sentry Insurance
* Shelter Insurance Companies
* State Auto Insurance Companies
* State Farm Insurance
* Southern Farm Bureau
* Union Standard Insurance
* United Automobile Insurance Company
* USAA
* Wausau Insurance Companies
* West Bend Mutual Insurance Company
* Westfield Insurance
* Zenith Insurance Company
* Zurich Insurance Services
* Island Insurance
* The Phoenix Group
* RLI Corp
* Badger mutual Insurance company

Travel Insurance


* American Family Insurance
* ASSIST-CARD

Workers' Compensation

* ACE
* AIG
* Amerisafe
* Amerisure
* Liberty Mutual
* Missouri Employers Mutual
* Penn National Insurance
* Sentry Insurance
* State Accident Insurance Fund (Oregon)
* State Compensation Insurance Fund (California)
* Merchants Insurance Group
* Zenith Insurance
* Zurich Insurance
* Arch Insurance
* Erie Insurance
* PMA Insurance Company
* Chubb Insurance Group
* The Hartford Financial Group
* The Travelers Companies, Inc.

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insurance premium tax

Law

The main law relating to IPT is in the:

* Finance Act 1994, sections 48-74 and Schedules 6A, 7 and 7A, as amended by the Finance Acts 1997, 1998 and 1999. This is the primary legislation, which establishes the principles of IPT.
* Insurance Premium Tax Regulations 1994 (Statutory Instrument 1994/1774 - as amended) which gives more details about the operation of the tax.

Rates

There are two different insurance premium tax rates:

* a standard rate of 5 per cent
* a higher rate of 17.5 per cent

You must register and account for insurance premium tax if you are an insurer providing taxable insurance. You will also have to register and account for insurance premium tax if you are an intermediary selling insurance subject to the higher rate of insurance premium tax and you charge a separate insurance-related fee, over and above the insurance premium itself.

Rate change history

The tax rates, since the introduction of IPT, are:

1 October 1994 to 31 March 1997 - a single rate of 2.5 per cent The standard rate:

1 April 1997 to 30 June 1999 - a standard rate of 4 per cent;

1 July 1999 to date - a standard rate of 5 per cent. The higher rate:

1 April 1997 to date a selective higher rate of 17.5 per cent on certain types of insurance arranged through certain suppliers of other goods and services; From 1 August 1998 the higher rate was extended to all taxable travel insurance, regardless of the type of supplier

Exemptions

All types of insurance risk located in the UK are taxable unless they are specifically exempted. Exemptions from this tax include:

* reinsurance
* "long-term" insurance, including life insurance and permanent health insurance, but excluding medical insurance
* commercial aircraft insurance
* commercial ships and lifeboats insurance
* export finance
* insurance on commercial goods in international transit
* insurance for risks outside the UK
* insurance on international railway rolling stock

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insurance and finance

Insurance and Finance is a research programme set up by the Geneva Association, also known as the International Association for the Study of Insurance Economics. This research programme on insurance and finance comprises academic and professional research activities in the fields of finance where they are relevant to the insurance and risk management sector.

The aim of the research programme is dedicated to making an original contribution to the progress of insurance through different initiatives in the field of insurance finance. It engages in: highlighting issues of key importance, promoting studies of the function of finance in insurance, discussing the relevance of financial concepts and instruments to the industry, detecting new and promising theoretical developments, and diffusing knowledge and the results of research worldwide.

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Regulation of insurance companies

Regulation of insurance companies

In the United States

As a preliminary matter, insurance companies are generally required to follow all of the same laws and regulations as any other type of business. This would include zoning and land use, wage and hour laws, tax laws, and securities regulations. There are also other regulations that insurers must also follow.

Regulation of the business of insurance

Insurance regulation that governs the business of insurance is typically aimed at assuring the solvency of insurance companies. Thus, this type of regulation governs capitalization, reserve policies, rates and various other "back office" processes.

In the United States each state typically has a statute creating an administrative agency. These state agencies are typically called the Department of Insurance, or some similar name, and the head official is the Insurance Commissioner, or a similar titled officer. The agency then creates a group of administrative regulations to govern insurance companies which are domiciled in, or do business in the state.

The origins of insurance policies in general differs through various countries. Limited policies (particularly against damage to homes) can be traced to the 17th and 18th centuries, though establishment of newer policies (such as health insurance and car insurance) did not come until the 20th century.

In the United States regulation of insurance companies is almost exclusively conducted by the several states and their insurance departments. Various states have different names for their regulatory agencies and regulators. In many states the department is called the Department of Insurance, and the regulator is called the Insurance Commissioner - although there are numerous variations. The federal government has explicitly exempted insurance from federal regulation in most cases.

However, regulation of the insurance industry began in the 1940s in the United States, through several United States Supreme Court rulings. The first ruling on insurance had taken place in 1868 (in the Paul v. Virginia ruling[1]), with the supreme court ruling that insurance policy contracts were not in themselves commercial contracts. This stance did not change until 1944 (in the United States v. South-Eastern Underwriters Association ruling [2]), when the Supreme court upheld a ruling stating that policies were commercial, and thus were regulatable as other similar contracts were.

Nowadays, many countries - and states in the United States - regulate insurance companies through laws, guidelines and independent commissions and regulatory bodies. These laws and statutes ensure that the policy holder is protected against bad faith claims on the insurer's part, that premiums are not unduly high (or fixed), and that contracts and policies issued meet a minimum standard.

A bad faith action may constitute several possibilities; the insurer denies a claim which is seemingly valid in the contract or policy, the insurer refuses to pay out for an unreasonable amount of time, the insurer lays the burden of proof on the insured - often in the case where the claim is unprovable. Other issues of insurance law may arise when price fixing occurs between insurers, creating an unfair competitive environment for consumers. A notable example of this is where Zurich Financial Services [3] - along with several other insurers - inflated policy prices in an anti-competitive fashion. If an insurer is found to be guilty of fraud or deception, they can be fined either by regulatory bodies, or in a lawsuit by the insured or surrounding party. In more severe cases, or if the party has had a series of complaints or rulings, the insurers license may be revoked or suspended.

In the case that an insurer declares bankruptcy, many countries operate independent services and regulation to ensure as little financial hardship is incurred as possible (National Association of Insurance Commissioners operates such a service in the United States [4]).

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Insurance

Insurance, in law and economics, is a form of risk management primarily used to hedge against the risk of a contingent loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium, and can be thought of as a guaranteed small loss to prevent a large, possibly devastating loss. An insurer is a company selling the insurance; an insured or policyholder is the person or entity buying the insurance. The insurance rate is a factor used to determine the amount to be charged for a certain amount of insurance coverage, called the premium. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice.

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