Natural Catastrophes: Preparing for the Inevitable
When it comes to natural disasters, preparation and prevention are just as vital as insurance.
Frequency and Severity.
These two words are often used to quantify risk and under normal circumstances, they are inversely proportional. Losses that happen frequently tend to be less expensive while the billion dollar losses tend to be rare.
However, over the last several years, the loss trends for natural catastrophes have been going in a new direction, with billion-dollar events on the rise.
Recent U.S. weather data from the NOAA’S National Centers for Environmental Information paints the picture:
- In 2016, 14 separate weather-related events cost more than $1 billion each (see graphic below).1
- Losses from these 14 events totaled more than $42 billion, the highest amount since 2012.1
“Most people know that natural disasters are increasing in magnitude and cost, but many clients are not aware of how those trends are changing at their specific locations,” said Aja Atwood, Global NAT CAT Practice Leader, National Insurance Property, Liberty Mutual Insurance.
Businesses in areas with historically low exposure especially need to reevaluate their natural hazard risk. When it comes to natural catastrophes, preparation and prevention are just as vital as insurance.
Identify Exposures
With hail, wind storms and hurricanes broadening their geographic footprints, no business should assume that they are safe from any particular type of severe weather.Companies can conduct routine checks of their properties and identify areas for improvement. Roof age and material are key factors impacting the level of damage done by a storm. Even a few years of exposure to the elements can weaken a roof’s integrity. Risk managers should establish timelines for roof repair or replacement.
Business interruption exposure is also an important consideration.
“Even if the reported physical damage values are low, you can still have a significant business interruption claim,” said Rob Morelli, Head of Engineering Technical Unit, National Insurance Property, Liberty Mutual.
“For example, a location has one primary electrical feed and the transformer for that feed is in a flood zone. It may be one small transformer that only costs $15,000, but has about $100 million tied to it in revenue,” he said.
Strengthen Vulnerabilities
Once the weaknesses are identified, it’s time to develop a mitigation strategy.For businesses with large schedules of property, prioritizing repairs and creating a long-term maintenance schedule are key. That can mean replacing roofs or installing hail guards and rooftop equipment protections.
Keeping buildings in top shape can help minimize damage when severe weather hits, but it’s also critical to have emergency response and business continuity plans in place to reduce downtime. “A fast response not only mitigates business interruption losses, it also establishes a process to account for workers’ safety and helps a company report claims more quickly after a loss,” says Atwood.
Business continuity plans can include having replacement parts on hand for critical pieces of equipment, identifying sister facilities that can pick up some slack when operations are halted, and creating a communication plan to keep customers and employees informed.
Prepare People
Preparing buildings and equipment to withstand natural catastrophes is one thing. Preparing people is another.Risk managers should consult with senior managers and employees to understand how weather could impact different operations. The people closest to the work – and most knowledgeable about its vulnerabilities – need to be involved in emergency preparation and response plans. Designate key personnel who have the authority to make decisions in the event of an emergency, like sending out alerts or shutting down a facility.
“Open communication should also extend to other facilities who may have additional insights or preparation recommendations for types of weather they experience more frequently,” Morelli said.
Leverage the Latest Tools
Existing CAT models provide a high level overview of exposure based on zip code, but risk managers with several locations need granularity. More advanced predictive models can map exposure on a micro level by factoring in unique property characteristics like roof age and material, type of construction, the overall condition of a building, number of stories, and any protections already installed.Liberty Mutual is developing these types of predictive models to provide a clearer view of natural catastrophe exposure and to help guide mitigation plans.
While some data comes from client input, site visits conducted by a team of experienced risk engineers provide more detail.
“For customers with multiple properties, we schedule visits based on several factors, such as a location’s total insurable value, the level of NAT CAT exposure, time between visits, etc. Looking at these details enables us to provide guidance to customers as to where they should focus immediate efforts.” Morelli said.
“Only by walking on the roof can I know that it’s a single-ply roof cover that’s lost its adhesion, or that there aren’t enough fasteners. Or that they have unprotected skylights in a hail zone,” Atwood added. “My recommendations would be catered towards that location’s specific exposures, and what the budget allows for one month from now and one year from now.” A risk managers can then manage site-specific exposures and prioritize recommendations across the business’s entire portfolio of properties.
Imminent warning systems also help clients stay aware of potential threats in the area. Liberty Mutual monitors the National Weather Services and other local weather resources, tracking conditions like freezing temperatures, high winds and hail.
“If we see patterns that are cause for concern, we can send out an email blast to everyone in the affected area.” Atwood said. The communication provides guidance on storm preparation and what to do in the event of a claim.
These loss control services are what truly add value to an insurance solution.
“If you rely on insurance coverage too much, you forget there are things you can do proactively to protect your business and your livelihood,”
XXX . V Business Insurance Electronic Data Processing (EDP) Coverage
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Electronic data processing (EDP) insurance covers damage to computers, media and data. This coverage is important if your business depends on computers to carry out its day-to-day operations. It fills many of the gaps that exist in standard commercial property policies with regard to electronic equipment.
Hardware
Computer hardware includes equipment such as mainframe computers, laptops and workstations. Depending on the policy, it may also include copiers, scanners, telephone systems, and air conditioning equipment maintained exclusively for computers. When buying EDP coverage, be sure the definition of hardware includes the types of equipment you use in your business.
Many EDP policies cover hardware you have leased from someone else. If your company leases computers, make sure that leased equipment qualifies as hardware under your EDP policy. You should also read your contract carefully. Many lease agreements hold the lessee liable for any damage the equipment sustains during the term of the lease. Your lease may hold you responsible for damage caused by perils that aren't covered by your policy.
Software and Data
Computer programs, software and data are also covered under EDP forms. Software generally includes systems software, applications software, and proprietary programs.
Media
The term media means devices on which data are stored. Examples are discs, drums, and tapes. Some policies include "media" as a separate category of covered property. Others cover media as part of "software."
Like any property, electronic equipment may be damaged by fire, wind and other common perils. Yet, it is particularly vulnerable to damage by the perils listed below.
Other perils covered by many EDP policies include computer virus and computer hacking. "Hacking" may include acts committed by employees. Coverage for damage caused by viruses or hacking may be subject to a sublimit.
For example, your five-year-old computer is damaged by a power surge and cannot be repaired. You are unable to replace the computer with an identical model because that model is no longer available. Thus, your insurer pays the cost of a new, different model that performs similar functions as your old one. If the new machine costs less than the limit shown on your policy for the damaged one, your insurer will not pay more than the cost of the new machine.
If data or software is damaged or destroyed, your policy may pay the cost to reinstall or reproduce it from duplicates. If no duplicates exist, your policy may cover the cost to reproduce the data or software, including the cost of research.
XXX . V00 BASIC ELECTRONIC DATA PROCESSING COMPUTER
No Standard Coverage
EDP coverage goes by several names. Examples are Computer Coverage, and Data Processing Coverage.
EDP insurance can be written by itself, or added to a property or package policy via a separate form or endorsement.
EDP policies vary widely. Some insurers utilize a preprinted EDP form published by AAIS (a rating organization similar to ISO). Many others use forms they have developed themselves. Here are some questions to ask when shopping for an EPD coverage:- What types of equipment and accessories are covered by the policy?
- What perils are covered? Which ones are excluded?
- Is hardware, data and software covered for damage caused by viruses and hacking?
- How is the value of damaged property calculated?
- Does the policy cover loss of income and extra expense?
- What additional coverages are included?
Covered Property
Most EDP policies cover damage to equipment, data and other items described in a section entitled Covered Property. Policies typically cover three categories of property: computers and other hardware, electronic media, and data (including programs and software).Computer hardware includes equipment such as mainframe computers, laptops and workstations. Depending on the policy, it may also include copiers, scanners, telephone systems, and air conditioning equipment maintained exclusively for computers. When buying EDP coverage, be sure the definition of hardware includes the types of equipment you use in your business.
Software and Data
Computer programs, software and data are also covered under EDP forms. Software generally includes systems software, applications software, and proprietary programs.
Media
The term media means devices on which data are stored. Examples are discs, drums, and tapes. Some policies include "media" as a separate category of covered property. Others cover media as part of "software."
Covered Perils
EDP policies contain many fewer exclusions than standard property policies. Most cover "all-risks," meaning all perils that are not specifically excluded. Many (but not all) EDP policies cover damage caused by flood and earthquake.Like any property, electronic equipment may be damaged by fire, wind and other common perils. Yet, it is particularly vulnerable to damage by the perils listed below.
- Electrical disturbances (including arcing and short circuits)
- Temperature and humidity changes
- Mechanical breakdown
- Power surges
Other perils covered by many EDP policies include computer virus and computer hacking. "Hacking" may include acts committed by employees. Coverage for damage caused by viruses or hacking may be subject to a sublimit.
Valuation
Depending on the policy, the value of damaged EDP property may be calculated based on its:- Actual cash value
- Replacement cost; or
- Functional replacement cost
For example, your five-year-old computer is damaged by a power surge and cannot be repaired. You are unable to replace the computer with an identical model because that model is no longer available. Thus, your insurer pays the cost of a new, different model that performs similar functions as your old one. If the new machine costs less than the limit shown on your policy for the damaged one, your insurer will not pay more than the cost of the new machine.
If data or software is damaged or destroyed, your policy may pay the cost to reinstall or reproduce it from duplicates. If no duplicates exist, your policy may cover the cost to reproduce the data or software, including the cost of research.
Income and Expense Losses
If your business depends on computers or electronic data to function, damage to that property could cause your business to shut down. A total or partial shutdown of your operations could cause your business to lose income or incur extra expenses. Fortunately, many EDP policies include business income and extra expense coverages. These may be included automatically or available by request.Other Coverages
Most EDP policies include various additional coverages. Some examples are listed below. These may be included automatically or provided for an additional premium. They are usually subject to a specified limit.- Newly Acquired EDP Equipment
- EDP Equipment at Newly Acquired Premises
- EDP Equipment in Transit
- Utility Interruption
- EDP Equipment Offsite
XXX . V00 BASIC ELECTRONIC DATA PROCESSING COMPUTER
Standard business insurance property policies provide limited, very basic, coverage for your contents including computers. The unique risks that computer equipment face requires specialized coverage for your computers, peripheral devices and media as well as unique exposures they create for the costs to research, replace or repair lost or damaged data and software as a result of covered damage to computer equipment, certain power failures, or a computer virus or hacking risks.
Technology is everywhere today in businesses small and large. Virtually all businesses rely upon their computer and data management systems to function and that technology represents a sizable investment, and risk, to your business and bottom line.
BASIC ELECTRONIC DATA PROCESSING COMPUTER POLICY COVERAGE’S
Electronic Data Processing (EDP) insurance is designed to cover the unique risks associated with computer exposures and typically include three core areas of coverage;:
- Equipment (Personal computers, servers, terminals, monitors, laptops and other hardware).
- Media (Disk drives, disks, magnetic tapes and other areas where data is stored in your equipment).
- Data (Software applications that store your business data and facts, concepts, or programs as well as additional expenses associated with data recovery).
The Equipment and Media sections are specialized property coverage’s that address the unique exposures face as compared, say, to inventory or business furnishings. Equipment and Media coverage can be written on a replacement cost or actual cash value basis. You can also insure your equipment on scheduled basis, in which all equipment is listed on the policy with a limit per item, or on a blanket basis. EDP coverage carries from insurer to insurer but, when possible, it is wise to seek a policy that offers a blanket limit with replacement cost and without a coinsurance clause.
The risks associated with data exposures are important to consider since data, when damaged or destroyed, is often difficult and expensive to replace or retrieve. Keeping in mind that data insurance coverage is not standardized, difference insurers define their coverage in the insurance marketplace; carriers may define data differently and offer different forms of coverage. A close examination of the terms of your policy is necessary to determine the adequacy of your data coverage.
In addition to protecting your computer equipment and data from physical damage and other risks businesses today are increasingly faced with Cyber Liability exposures that require specialized protection. To learn more about Cyber Liability coverage please click here or contact us at 305.238.1000.
EDP DATA COVERAGE COMPARISON QUESTIONS
When you compare one policy to another some important questions to consider include:
- Does your policy provide coverage for losses caused by a computer virus?
- Accidental erasure of data?
- Does your policy provide coverage for losses caused by hacking?
- Employee sabotage?
- Does your policy include coverage for a denial of access?
- Changes in temperature?
- Does your policy include coverage for business interruption and extra expense coverage?
- Short circuiting of equipment?
- Does your policy include coverage for the cost of hiring a forensic expert if one is needed?
Morris & Reynolds represents the world’s leading, competitive, Computer Hardware, EDP, insurers for all of the risks you face.
A UNIQUE APPROACH TO BUSINESS INSURANCE
Business insurance is our business. When it comes to your coverage and the risks your enterprise and people face we treat your business as if it were our very own. At Morris & Reynolds we offer a unique, hands on, passionate relationship with our clients that in most cases last decades because of the reliable, results oriented, solutions we provide from year to year. Some of the benefits of our business insurance work for our clients include;
SUPERIOR MARKET KNOWLEDGE, RELATIONSHIPS & INSURER ACCESS
Morris & Reynolds represents and has access to the entire market of leading insurers for all of the risks our business insurance client face. Many of our relationships with major insurers span decades and in some cases date to the founding of our firm in the 1950’s. We also take pride in representing cutting edge and emerging insurers from around the globe to structure the coverage, limits and costs you need and deserve.
ALL FORMS OF INSURANCE, EMPLOYEE BENEFITS & RISK RELATED SERVICES
Our dedicated professional people are your consultants, problem solvers and partners. We help assess your needs, evaluate solutions and suggest alternatives for your organization. We build a high level of familiarity with your company so we can offer the insights that satisfy your changing risk-financing needs. Some of our products and services include:
- Alternative Risk Financing, including Captives and Risk-Sharing Pools
- Claims Management & Administration
- General Property and Casualty Insurance
- Group Health Insurance & Employee Benefit’s
- Malpractice and Errors & Omissions
- Pension & Retirement Plans
- Professional Liability including Directors and Officers and Employment Practices
- Risk Management & Loss Control Services
- Workers Compensation and Employers Liability
Your protection, goals and bottom line are our sole focus. The coverage and costs that we negotiate, in fact all we do, is focused on your protection needs, goals and bottom line. We are known as aggressive negotiators who have our clients’ best interest at heart. Always.
We also enjoy serving our clients in the most transparent manner possible and are happy to discuss and disclose our compensation and answer your questions about that important topic with you. Morris & Reynolds is a truly independent insurance agency and has been since 1950. Our focus is never on stockholders, stock prices or an insurance company preference but our clients’ goals, dreams and desires. Always.
PEACE OF MIND
Insurance is more than a legal contract, it’s your peace of mind. At Morris & Reynolds Insurance we take your protection, and peace of mind, to heart in all we do from the coverage we structure, the insurers we suggest and the day to day service and care we provide to our clients. When you need us most, we will always be there.
VISION & INNOVATION
At Morris & Reynolds Insurance our clients receive the best of both worlds. We are well known for our ‘old fashioned, reliable and responsive service that dates to the founding of our agency in 1950. We are also known for employing cutting edge technology and offering the latest in coverage innovations and ideas to serve our clients’ ever evolving needs. Services such as The Protection Portal, Morris & Reynolds MyWave and the Morris & Reynolds Risk Management & Loss Prevention Services are just a few examples of our forward thinking approach to service.
AWARD WINNING, EDUCATED, PROFESSIONAL PEOPLE
Our Client Service Underwriters, Client Advocates and Professional Agents are deeply committed to their profession and career-long learning. Our award winning TEAM of professional people, the finest people in insurance, is unique to Morris & Reynolds Insurance. In order to offer our client’s the very finest results possible we constantly seek improvement by way of training, performance measurement and process reviews.
Our corporate office is an approved and certified testing site for the prestigious Insurance Institute of America and their curriculum is part of our ongoing TEAM educational efforts. Morris & Reynolds Insurance is proud of the awards that TEAM members have received from a variety of industry associations and insurers, including the Florida Agent of the Year, The National Agent of the Year and The Customer Service Representative of the Year Honors to name a few.
A UNIQUE APPROACH TO RISK REDUCTION
Every day we work to provide you with the very best coverage, care and solutions available. Our extensive range of professional services, designed to manage your risk and make you and your business more efficient, include:
ANNUAL UPDATING & RISK REVIEW
Businesses change and evolve. Because of this, Morris & Reynolds conducts annual audits of your coverage and the exposures, risks and facts that your insurance is based upon. Working many months in advance of your renewal, we ensure that the coverage and exposures are current so that your renewal will progress as your business does.
AUDIT ASSISTANCE
Coverage such as workers compensation and general liability are based on estimated exposures that are then audited by the insurer after the policy year ends. Our team of experts is available to assist in the preparation of your audit or even conduct the audit with the insurer for you, to save you time and money.
CLAIMS MANAGEMENT
We place an extreme emphasis on your claims. Morris & Reynolds employs licensed, professional insurance adjusters that manage your claims all year long with state of the art automation. Your assigned Claims Manager at Morris & Reynolds is your expert advocate, dedicated to resolving claims quickly and fairly. Whether it is a simple auto claim, a major fire, a devastating hurricane or a complex lawsuit, we will be right next to you doing our best to support you during what we know can be a traumatic time.
ROBUST, ANNUAL, MARKET RESEARCH & AGGRESSIVE NEGOTIATIONS
Morris & Reynolds represents hundreds of the world’s leading insurers, brokers, wholesalers, reinsurers and alternative risk related firms in the industry. As your agent, we aggressively seek solutions from all leading insurers in the marketplace and negotiate one insurer against another to arrange the best possible coverage and cost for you.
RISK MANAGEMENT & LOSS CONTROL
Protecting your business and bottom line through risk management and loss control can have a dramatic impact in lowering your insurance costs and risk related expenses. The risks that you face can come from a variety of sources including project failures, legal liabilities, natural disasters and even deliberate attacks. We proudly offer you best in class risk management and loss control that can help identify, control and manage the risks you face.
STEWARDSHIP & DEEP ANALYSIS
Success in reducing your risk and its associated costs are often found deep in the details of your coverage, claims and business. For this reason, Morris & Reynolds provides a range of detailed stewardship reports and analysis related to your coverage, options, performance, claims and other risk related metrics that are useful in constructing your Protection Plan and managing your risks.
MORRIS & REYNOLDS MYWAVE
Morris & Reynolds’ MyWave is a truly dynamic internet-based portal that delivers robust, time saving tools and information related to employee benefits, human resources and risk management. Simply log on to your customized homepage to find valuable detailed information as well as interactive postings.
XXX . V0000 Robot Take the Wheel: Insurance Implications of Autonomous Vehicles
The era of the self-driving car has arrived, with the shiny promise of fewer auto collisions—and the inevitable potholes of a transformative technology. Despite the significant concerns raised by a recent accident involving a driver’s reliance on 
a partially autonomous automatic braking and steering system on the Tesla Model S—one of 70,000 such vehicles now on the roads—the auto industry is roaring ahead with autonomous vehicles (AVs). Google is testing its driverless cars extensively on U.S. roads; General Motors has teamed up with car-sharing company Lyft to develop a driverless taxi service; and most major automakers will be releasing fully or partially autonomous vehicles in the next five years.
While the auto industry is proceeding in the fast lane, the insurance industry is straining to keep pace. The advent of autonomous vehicles raises numerous questions about how the auto insurance industry will respond to the development of AVs: Who bears the risk for accidents that these AV safety systems fail to prevent? What additional exposures are created by the transition to automated driving systems and smart roads, and who should bear those risks? A 2016 survey of corporate risk managers by RIMS found that the majority (55 percent) saw cyber-security (specifically, the takeover of vehicles by hackers and failure of smart road infrastructure) as the largest potential exposure. What types of insurance products would cover accidents of this type? Are current insurance products adequate, or will new forms of coverage need to be developed?
Let’s talk about the first question: Who should bear the risk of an accident involving an AV where the AV system caused or failed to prevent the accident? The answer depends first on the level of control that system has over driving functions. No car currently on the market is fully autonomous; humans must still be attentive, notwithstanding videos on social media showing drivers being anything but attentive. Tesla made this point clear in its response to a fatal accident involving a Model S that had its autopilot feature activated. The driver killed in that accident had “standard” auto insurance on the Tesla, but standard auto insurance does not factor driver-assisting functions into its underwriting. It could take as long as a decade for the auto insurance market to collect data on the development of driver-assist features and then respond with changes in risk-rating formulae. An important metric in that analysis by the insurance industry will be the ability to differentiate between when accidents are caused by driver mistake versus software failure.
Another fascinating issue is what decision a fully autonomous software system will be programmed to make when faced with a difficult choice. Science magazine recently conducted a survey to gauge readers’ thoughts on what types of choices an autonomous vehicle should make when faced with a dilemma of harming its passengers versus harming other drivers or pedestrians. The results, which can be found here , show that, from a public policy perspective, respondents favor cars programmed to sacrifice passengers for the greater good, and want other drivers to have cars programmed that way. Naturally, when it comes to their own cars, though, respondents would rather their own AV be programmed to preserve their passengers’ lives at all costs. The increasing role of manufacturers in designing the capability of AVs, as well as in programming these kinds of decisions into their products’ safety systems, will ultimately require a fundamental shift in the role of personal auto insurance for AVs, from an individual risk underwriting approach to a product liability approach.
It is hard to imagine how the auto insurance industry will be able to transform itself in a world of reduced accidents and a shift from human control to mechanical safety systems. A 2016 Rand study on AVs predicted that this shift would be achieved through tort litigation against manufacturers. The study theorizes that, as the focus on drivers’ fault is reduced, the responsibility for accidents will shift from drivers to manufacturers. The study posits that “no-fault” compensation systems could be a good solution to avoid costly products liability actions and enormous liability awards that could stifle development of the technology—and of course no-fault systems are in place in numerous states. Another possibility envisioned by the study is that manufacturers could limit or avoid liability by meeting government-set standards of technology that would exempt manufacturers from liability so long as they can demonstrate compliance with those standards. Such an environment would be similar to the workers’ compensation system, where state law preempts an injured worker’s right to sue his or her employer for injuries, and limits that worker’s recovery to statutorily defined benefits capped at certain amounts. The employer is also required, under this system, to have insurance that pays those benefits, or demonstrate the financial capacity to pay them itself. This kind of insurance-compensation scheme would allow for victims harmed in accidents caused by AVs to be compensated for their harms, but also prevent rampant products liability litigation from threatening the development and production of AVs by making the liability costs associated with them prohibitive.
As driver involvement declines in the transition to AVs, the shift of liability from drivers to automakers makes sense. From an economic standpoint, auto manufacturers will be better positioned to bear the cost of accidents caused by a failure of their AV systems, or the cost of premiums for insurance that responds to those accidents. A similar shift has already happened in the car-hailing industry exemplified by companies like Uber and Lyft. Those companies provide some insurance coverage for their drivers during the times they are engaged in driving for the company. As laws and regulations catch up with the pace of innovation, we may well see schemes limiting liability or establishing compensation systems. For companies that use AVs as part of their corporate fleets, the savings on liability and insurance may be realized quickly, with reduced human capital, lower overhead, safer vehicles involved in fewer accidents and lower insurance premiums. The future of driving may not be bright from the point of view of the auto enthusiast, but from a liability and insurance standpoint, driverless cars holds the promise of economic progress and improved human safety—a potentially huge benefit for society as a whole.
XXX . V0000 Your next insurance agent will be a robot
a partially autonomous automatic braking and steering system on the Tesla Model S—one of 70,000 such vehicles now on the roads—the auto industry is roaring ahead with autonomous vehicles (AVs). Google is testing its driverless cars extensively on U.S. roads; General Motors has teamed up with car-sharing company Lyft to develop a driverless taxi service; and most major automakers will be releasing fully or partially autonomous vehicles in the next five years.While the auto industry is proceeding in the fast lane, the insurance industry is straining to keep pace. The advent of autonomous vehicles raises numerous questions about how the auto insurance industry will respond to the development of AVs: Who bears the risk for accidents that these AV safety systems fail to prevent? What additional exposures are created by the transition to automated driving systems and smart roads, and who should bear those risks? A 2016 survey of corporate risk managers by RIMS found that the majority (55 percent) saw cyber-security (specifically, the takeover of vehicles by hackers and failure of smart road infrastructure) as the largest potential exposure. What types of insurance products would cover accidents of this type? Are current insurance products adequate, or will new forms of coverage need to be developed?
Let’s talk about the first question: Who should bear the risk of an accident involving an AV where the AV system caused or failed to prevent the accident? The answer depends first on the level of control that system has over driving functions. No car currently on the market is fully autonomous; humans must still be attentive, notwithstanding videos on social media showing drivers being anything but attentive. Tesla made this point clear in its response to a fatal accident involving a Model S that had its autopilot feature activated. The driver killed in that accident had “standard” auto insurance on the Tesla, but standard auto insurance does not factor driver-assisting functions into its underwriting. It could take as long as a decade for the auto insurance market to collect data on the development of driver-assist features and then respond with changes in risk-rating formulae. An important metric in that analysis by the insurance industry will be the ability to differentiate between when accidents are caused by driver mistake versus software failure.
Another fascinating issue is what decision a fully autonomous software system will be programmed to make when faced with a difficult choice. Science magazine recently conducted a survey to gauge readers’ thoughts on what types of choices an autonomous vehicle should make when faced with a dilemma of harming its passengers versus harming other drivers or pedestrians. The results, which can be found here , show that, from a public policy perspective, respondents favor cars programmed to sacrifice passengers for the greater good, and want other drivers to have cars programmed that way. Naturally, when it comes to their own cars, though, respondents would rather their own AV be programmed to preserve their passengers’ lives at all costs. The increasing role of manufacturers in designing the capability of AVs, as well as in programming these kinds of decisions into their products’ safety systems, will ultimately require a fundamental shift in the role of personal auto insurance for AVs, from an individual risk underwriting approach to a product liability approach.
It is hard to imagine how the auto insurance industry will be able to transform itself in a world of reduced accidents and a shift from human control to mechanical safety systems. A 2016 Rand study on AVs predicted that this shift would be achieved through tort litigation against manufacturers. The study theorizes that, as the focus on drivers’ fault is reduced, the responsibility for accidents will shift from drivers to manufacturers. The study posits that “no-fault” compensation systems could be a good solution to avoid costly products liability actions and enormous liability awards that could stifle development of the technology—and of course no-fault systems are in place in numerous states. Another possibility envisioned by the study is that manufacturers could limit or avoid liability by meeting government-set standards of technology that would exempt manufacturers from liability so long as they can demonstrate compliance with those standards. Such an environment would be similar to the workers’ compensation system, where state law preempts an injured worker’s right to sue his or her employer for injuries, and limits that worker’s recovery to statutorily defined benefits capped at certain amounts. The employer is also required, under this system, to have insurance that pays those benefits, or demonstrate the financial capacity to pay them itself. This kind of insurance-compensation scheme would allow for victims harmed in accidents caused by AVs to be compensated for their harms, but also prevent rampant products liability litigation from threatening the development and production of AVs by making the liability costs associated with them prohibitive.
As driver involvement declines in the transition to AVs, the shift of liability from drivers to automakers makes sense. From an economic standpoint, auto manufacturers will be better positioned to bear the cost of accidents caused by a failure of their AV systems, or the cost of premiums for insurance that responds to those accidents. A similar shift has already happened in the car-hailing industry exemplified by companies like Uber and Lyft. Those companies provide some insurance coverage for their drivers during the times they are engaged in driving for the company. As laws and regulations catch up with the pace of innovation, we may well see schemes limiting liability or establishing compensation systems. For companies that use AVs as part of their corporate fleets, the savings on liability and insurance may be realized quickly, with reduced human capital, lower overhead, safer vehicles involved in fewer accidents and lower insurance premiums. The future of driving may not be bright from the point of view of the auto enthusiast, but from a liability and insurance standpoint, driverless cars holds the promise of economic progress and improved human safety—a potentially huge benefit for society as a whole.
XXX . V0000 Your next insurance agent will be a robot
Smarter machines mean more jobs are at risk of automation. Yours may be next.
Zacharia took aim at the $220 billion-a-year US auto insurance industry on Thursday when she launched Insurify. Technically, her Cambridge, Massachusetts-based startup isn't an insurance company. Rather it helps you sort through the maze of competing companies, their premiums and those dizzying coverage plans. Think of it as Travelocity for auto insurance.
To do it, 39-year-old Zacharia uses a robot -- not the humanoid kind from sci-fi movies, but smart software instead. Still, watch out, Jake at State Farm and Flo at Progressive. Your replacement's name is Evia, short for "expert virtual insurance agent."Snap a photo of your license plate, text it to Evia, which will ask you a few questions via text and then scour 82 insurance carriers' plans to find you the best one for the money.
"No one in the industry is doing that," says Insurify's Bulgaria-born founder and CEO, noting that the process happens in an "instant."
In other words, Evia is just like your old insurance agent, except she's faster, smarter and cheaper.
Silicon Valley has a few technological obsessions these days. Virtual reality is one. Big data is another. But none threatens to replace people's jobs like smart machines, or computer programs that can understand human language, sort through vast stores of data, make sense of patterns and even teach themselves.
New tech has made a lot of jobs obsolete, though new careers have risen in their wake. Cars may have made the buggy whip maker unnecessary, but they also created the car mechanic.
This time might be different. Recent and rapid advances in the fields of machine learning and artificial intelligence look likely to replace, or at least radically change, careers once considered immune from automation.
"It's taking us to a jobless future," says Vivek Wadhwa, who oversees research in fields including robotics and artificial intelligence at Singularity University, a Silicon Valley think tank. "Over the next 10 to 15 years, I see major parts of the economy being wiped out."
Accountants have suffered serious incursions into their livelihoods by smart software. In 2014, 29 million people preferred to let Intuit's TurboTax do their taxes rather than a bean counter.
Even lawyers can't avoid the changes. Law firms have already begun using algorithms to vet electronic documents like email messages for their relevance to a case.
Think creative gigs can't be automated? Think again. Ipsy's software picks out makeup it feels you should be wearing. Another startup, Le Tote, chooses clothes for you. Last month, I received a pitch from Stylyze, a Seattle-based startup that says it has coded "the brain of an interior designer."
It's come to this: The BBC created a site last fall that lets you find out how soon your job will get taken over by a bot. Journalist ranks pretty low on the risk list, coming in at 285 out of 366 careers. Jobs like telephone sales people, typists, bookkeepers, bank and post office clerks are among the most likely to be automated out of existence.
Zacharia isn't all that worried by the trend. The former exec at market researcher Gartner said automation will simply make searching for the best deal on auto insurance a lot easier.
After a minor accident while finishing up graduate business school at MIT in 2013, Zacharia began looking for a better insurance plan when she saw her premium spike. She went online, searched sites and called a bunch of agents. She said she came away disgruntled and without an accurate apples-to-apples comparison of her options.
"The car insurance industry is worse off than where the travel industry was 10 years ago," she says. "The travel industry has an Expedia, a TripAdvisor and Travelocity."
Zacharia's company doesn't charge consumers to search for rates. Instead, it collects a commission when they choose an insurance company's plan. Insurify, she notes, is "not a lead-generation company" that has an incentive to steer consumers toward one plan over another.
She hopes Insurify, which has raised $2 million in seed funding, will help bring auto insurance up to speed. However, the tech she's bringing comes with costs and benefits.
"There might be a few Jakes that lose their jobs," Zacharia says, referring to State Farm's khaki-clad TV pitchman. "But there will be the few [remaining] who will just do 10 times the volume they're currently doing."
XXX . V00000 Special event liability insurance
General liability special event insurance
If you organize family, business or community events, you know how much planning and effort is involved.
Even with the most careful planning, unexpected situations can arise that you might not be prepared for. Special event insurance can help.
Why do you need special event liability insurance?
Our specialty liability event insurance features zero deductibles and helps protect against bodily injury and property damage claims. To qualify, your event must meet these eligibility standards:- Total event attendance must be fewer than 12,000
- Event days must be consecutive
- Event cannot go on for more than 10 consecutive days, excluding set-up and tear-down
- Event must be held at a single location you don’t own
XXX . V000000 Social media intelligence and profiling in the insurance industry
it’s not only the price you pay that will be affected
This piece was written by PI research officer Dr. Tom Fisher.
The financial services industry is eager to gather more and more data about our lives. Apart from mining the data they have historically collected such as credit history, they are looking to use our social media profiles to reach into our friendships and social interactions. They are using these data in new and unexpected ways, including personality profiling to determine the risk of lending to you, and thus the price you will pay.
Firstcarquote, a product from the car insurance company Admiral Insurance, is a leading example of such unexpected data exploitation. In a semi-aborted product launch in November 2016, the company proposed to use young drivers’ Facebook posts to determine their personality and use this information to offer discounts on car insurance. Not limited to causing damage to its own reputation, Admiral’s move raises serious questions about the future of the insurance industry.
While Admiral may have been forced into backing away from the use of young people’s Facebook posts to price insurance, the company is still working with companies that are involved in in the business of personality profiling and using social media intelligence to make predictions and decisions about people. Social media intelligence is collecting and analysing data from social media networks, like Facebook; this can include information contained in profiles, posts, images, and metadata like location. Are we ready for the consequence of social media-based risk scoring?
Admiral’s firstcarquote
In November 2016, Admiral Insurance announced a new product, firstcarquote, which used Facebook profile posts to determine young drivers’ personality and risk profile. Media coverage was amplified when Facebook announced the product would be blocked for breaking the terms of their Platform Policy.
The exercise may have been a media stunt for “a fairly standard new app for first time drivers” allowing Admiral to claim on firstcarquote.com it was “Probably the most talked about car insurance product ever …”. After the failure of the first lauch attempt, Firstcarquote then relaunched with a mandatory “login via Facebook” and personality quiz replacing the analysis of Facebook posts.
Personality profiling and insurance
This interest in social media intelligence was not just a one-off flirtation by Admiral. Data from social media is beginning to play a growing role in the financial sector, and Admiral continues to market personality profiling as a legitimate way to offer young drivers discounts on their car insurance.
In relation to firstcarquote, the app still has a mandatory Facebook sign in, but this grants access to “account information”, rather than a person’s posts. Account information is an individual’s name, email address, gender, birth date, current city, and their profile picture. An app that asks for this information is not required to go through Facebook’s app review process.
More interesting and less covered than the app is Admiral’s collaboration with VisualDNA. VisualDNA is a personality profiling company, with a focus on credit scoring for lenders. According to a MasterCard report, VisualDNA’s work in the credit sector measures attributes like “openness”, “neuroticism”, and “emotional stability” to assist with credit scoring, particularly for those “thin-file” customers who had a limited credit history.
Both parties saw this as beneficial partnership. VisualDNA, who having “already proven the benefits of applying our patented and unique psychometric tests to credit assessment” were “delighted to have the opportunity to work with Admiral to demonstrate the power of this approach to other forms of risk assessment such as motor [insurance].” Equally, Admiral believed “The more we know about our customers’ likely behaviour the better placed we are to price risk on an individual basis, giving customers an even more accurate price.”
The depth of the relationship is perhaps seen in the involvement of computer scientist Dr. Yossi Borenstein as “principal data scientist on firstcarquote”, who had previously worked with VisualDNA, where he was head of risk analytics. He has also published on the subject of VisualDNA’s personality tests.
Further, Admiral use VisualDNA’s cookie on their website, although it is unclear as to whether this is for profiling for advertising or risk purposes.
Admiral’s initial press release made a broad claim for the validity of personality testing for young driver insurance: “It’s scientifically proven that some personalities are more likely to have an accident than others.” They later weakened this to “a growing body of scientific evidence that…personality traits can be linked to driving risk”. Finally, as a post on their Facebook page puts it, “So, does your personality affect the way you drive? The short answer is: probably.” But, whether there this is a link between risk and personality for young drivers or not, the use of personality testing, and new data sources, has broader consequences for the insurance sector.
Social media data as intelligence
The use of social media intelligence is a developing field in the financial sector. Facebook’s Platform Policy may have prevented access to the data about people’s posts on this occasion, but the use of social media data to make predictions and decisions about people in the insurance sector is developing.
In this instance, the firstcarquote case attracted a great deal of publicity and Facebook deemed that the initial version of firstcarquote violated its platform policy. It purportedly measured personality by analysing, for example sentence length and use of exclamation marks; words like “always” or “never” (as opposed to “maybe”) could suggest overconfidence; and arranging to make appointments at a specific time, rather than a generic “this evening”, was allegedly a measure of how organized an individual is. Facebook’s platform policy governs how third-party apps can make use of Facebook. According to Facebook, Admiral violated term 3.15, which was introduced into the policy in May 2016:
“Don’t use data obtained from Facebook to make decisions about eligibility, including whether to approve or reject an application or how much interest to charge on a loan.”
Despite this, data from social media still play a role in the financial services industry. This is particularly the case for groups of people who have not had access to financial data before — requiring these sectors of society to be required to reveal more about themselves than others. For example, the use of social media intelligence for loans is aimed at those who do not have an existing credit history — typically, the poorest and most vulnerable. Similarly, with firstcarquote, it was a group without previous access to affordable insurance who were required to reveal more about themselves. It begins to seemthat some groups in society are more able to keep their privacy than others. Is this fair?
One typical example of the use of social media data is the work of Big Data Scoring (BDS), a credit scoring company who took on Admiral as a client in March 2016 announcing at that time, BDS “tap[s] into the broadest source of information from across the Internet, using all publicly available information”.
One of their products, BDS’ Digital Footprint DATA gathers information from a variety of sources that are considered ‘publicly available’, including some social media, blogs, and information through Google searches. It checks information like the device a person is using, and detailed information about their location. We note that the description of the cookie on the Admiral site includes,
“information about the user’s web browser and computer, which pages are accessed on the loan application site, how long the user spends on each page, how the user interacts with the pages and what actions they take during their visit.”
Detecting how a website is used can be a tool for fraud detection, and detecting bots. But cookies enable the linking of data to draw conclusions on every user of the loan site: the way in which you fill in an online form is becoming as important as the information we put into the form.
BDS’ original product from 2013–4, offered a social media score to loan providers to supplement or replace their existing decision-making processes. After giving access to a broad range of Facebook data — including profile data, status updates, likes, and locations — the algorithm made a decision on the likelihood that an individual would repay a loan. As the CEO and co-founder, Erki Kert, stated,
“All in all, that is c.a. 5,000–10,000 lines of data for each client. …. We often know more about borrowers than their family or relatives do.”
He also downplayed the serious privacy implications of such a statement:
“From applicants point of view, allowing access to all this Facebook data costs just 2 mouse clicks”.
The social consequences of industry shaping human behaviour
Young driver insurance doesn’t just affect the wallets of young drivers: it has an impact on society more broadly. The price of insurance isn’t only a measure of risk: it also potentially affects behaviour. And influencing the behaviour of young drivers is important. Despite making up less than 2% of license holders, young drivers are involved in almost 10% of all fatal and serious crashes.
More traditional pricing has the potential to have a positive impact on the safety of our roads: for instance, by pricing more powerful (and risky) cars higher, it encourages young drivers to choose more appropriate vehicles. While the price of insurance isn’t the only factor affecting the behaviour of young drivers, it is as the very least using another tool to encourage them to use the roads more safely, benefiting us all.
But, think about how basing price on social media posts would change behaviour. Would encouraging young people to use full sentences on Facebook do anything to make roads safer? Where is the social benefit of that?
In fact, we can see a social harm in the using social media in this way in financial services. It can change the way we communicate, which affects us all: it removes the honesty from our communications if we think that it might affect our financial standing. Is a friend posting a message because of a genuine desire to share their lives with their friends and followers, or are they giving a particular impression because they’re looking to apply for a mortgage in 6 months time?
The elements of social control in this can be more insidious. For instance, China is developing a social credit system; this is reportedly a method to influence behaviour online by developing a “social credit score”. Similarly, a lender in India is rejecting loan applications from people who post political messages on Twitter, as the lender fears that it is more difficult to get money back from the politically active if they don’t repay.
The future of the insurance sector
As the CEO of the financial services tech firm ZestFinance, and former Chief Information Officer of Google said in 2013, “We feel like all data is credit data, we just don’t know how to use it yet.”. The same could be said of the insurance industry, but this has consequences for the insurance industry itself.
A 2016 UK Financial Conduct Authority publication on the role of “big data” in the consumer financial market, identified as a risk the increased segmentation of the market, with the consequence that those customers deemed riskier are priced out the ability to get affordable insurance.
The risk can be taken to its conclusion: with more and more data collected, with a strong claim of the predictive power of algorithms, the size of the segments in the market are reduced, eventually to one. In other words, an insurance company would be able to quantify the precise risk of an individual. At some point along this process, insurance as we know it faces an existential threat: insurers are no longer working on the basis of collectivised risk that is at the heart of insurance. Thus the change to insurance, and how it works is a major one — that affects all of us in society.
Conclusion
Despite the measures taken by Facebook, it’s clear that both personality profiling and social media intelligence continue to have a continuing relevance in the insurance sector. This presents a challenge that goes beyond the price that individuals pay for their insurance, and it affects us all. We have to ask the question, is this fair? And, ultimately, there is a danger to the insurance industry itself.
Using social media intelligence in the financial services industry risks affecting how we present ourselves on social media. The selves that we present on social media become the selves that we would present at a meeting with our bank manager: feeling slightly uncomfortable in our Sunday Best, avoiding at all costs controversy, politics, and protest. That is, at the very least, a less interesting world to live in.
XXX . V0000000 Insurance
Insurance is a means of protection from financial loss. It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss.
An entity which provides insurance is known as an insurer, insurance company, or insurance carrier. A person or entity who buys insurance is known as an insured or policyholder. The insurance transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer 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, and must involve something in which the insured has an insurable interest established by ownership, possession, or preexisting relationship.
The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insured will be financially compensated. The amount of money charged by the insurer to the insured 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.
Early methods
Merchants have sought methods to minimize risks since early times. Pictured, Governors of the Wine Merchant's Guild by Ferdinand Bol, c. 1680.
At some point in the 1st millennium BC, the inhabitants of Rhodes created the 'general average'. This allowed groups of merchants to pay to insure their goods being shipped together. The collected premiums would be used to reimburse any merchant whose goods were jettisoned during transport, whether to storm or sinkage.[2]
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, and in the next century maritime insurance developed widely and premiums were intuitively varied with risks.[3] These new insurance contracts allowed insurance to be separated from investment, a separation of roles that first proved useful in marine insurance.
Modern insurance
Insurance became far more sophisticated in Enlightenment era Europe, and specialized varieties developed.
Lloyd's Coffee House was the first organized market for marine insurance.
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 growing importance as a center for trade was increasing 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, and 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.[6]
Leaflet promoting the National Insurance Act 1911.
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".[9]
In the late 19th century, "accident insurance" began to become available.[10] 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.
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.[11][12] 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.[13] This system was greatly expanded after the Second World War under the influence of the Beveridge Report, to form the first modern welfare state.[11][14]
Principles
Insurance involves pooling funds from many insured entities (known as exposures) to pay for the losses that some 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.[15]Insurability
Risk which can be insured by private companies typically shares seven common characteristics:[16]- Large number of similar exposure units: Since insurance operates through pooling resources, the majority of insurance policies are provided for 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 particular differences, which may lead to different premium rates.
- Definite loss: The loss takes place at a known time, in a known place, and from a known cause. The classic example is 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, in the sense that 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 the 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. If there is no such chance of loss, then 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 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, flood risk is insured by the federal government. 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 who 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:[17]- 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 is to 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.
- Utmost good faith – (Uberrima fides) the insured and the insurer are bound by a good faith bond of honesty and fairness. Material facts must be disclosed.
- 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.
Indemnification
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"[18]
- An "indemnification" policy
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.[18][19]
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.
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.[20] 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.[21]
Methods of insurance
In accordance with study books of The Chartered Insurance Institute, there are the following types of insurance:- Co-insurance – risks shared between insurers
- Dual insurance – risks having two or more policies with same coverage (Both the individual policies would not pay separately- a concept named contribution, and would contribute together to make up the policyholder's losses. However, in case of contingency insurances like 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 Insurer passes some part of or all risks to another Insurer called Reinsurer
Insurers' business model
Accidents will happen (William H. Watson, 1922) is a slapstick silent film about the methods and mishaps of an insurance broker. Collection EYE Film Institute Netherlands.
Underwriting and investing
The business model is 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.
- Through underwriting, the process by which insurers select the risks to insure and decide how much in premiums to charge for accepting those risks
- By investing the premiums they collect from insured parties
At the most basic level, initial ratemaking 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.[22] 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.[23] 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 (gathering 400 insurance companies and 94% of UK insurance services) has almost 20% of the investments in the London Stock Exchange.[24]
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.[25]
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. The 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.
The policyholder may hire their own public adjuster to negotiate the settlement 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 there is a third party involved, 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 the 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. 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
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 improved and personalized service. Companies also use Broking firms, Banks and other corporate entities (like Self Help Groups, Microfinance Institutions, NGOs etc.) to market their products.[26]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 that 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.[27]
Auto insurance
A wrecked vehicle in Copenhagen
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
Gap insurance covers the excess amount on your auto loan in an instance where your 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
Great Western Hospital, Swindon
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
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
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 liquidate wealth 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 a very 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
- 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.[28]
- 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, insects, or disease.[29]
- 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.[30]
- Landlord insurance covers residential and commercial properties which are rented to others. Most homeowners' insurance covers only owner-occupied homes.
- 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.
- 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.
- Volcano insurance is a specialized insurance protecting against damage arising specifically from volcanic eruptions.
- Windstorm insurance is an insurance covering the damage that can be caused by wind events such as hurricanes.
Liability
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.
- 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.
Credit
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.
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.[32] 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.
- 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.
- Nuclear incident insurance covers damages resulting from an incident involving radioactive materials and is generally arranged at the national level. (See the nuclear exclusion clause and, for the United States, the Price–Anderson Nuclear Industries Indemnity Act.)
- 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 very 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[33]
- 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.[34]
- 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.[citation needed] 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.[citation needed]
- 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):
- 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 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.
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.[35]
Insurance companies
Insurance companies may be classified into two groups:
- Life insurance companies, which sell life insurance, annuities and pensions products.
- Non-life or property/casualty insurance companies, which sell other types of insurance.
- Standard lines
- Excess lines
Insurance companies are generally classified as either mutual or proprietary companies.[36] 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.
Other possible forms for an insurance company include reciprocals, in which policyholders reciprocate in sharing risks, and Lloyd's organizations.
Insurance companies are rated by various agencies such as A. M. Best. The ratings include the company's financial strength, which measures its ability to pay claims. It also rates financial instruments issued by the insurance company, such as bonds, notes, and securitization products.
Reinsurance companies are insurance companies that sell policies to other insurance companies, allowing them to reduce their risks and protect themselves from very large losses. The reinsurance market is dominated by a few very large companies, with huge reserves. A reinsurer may also be a direct writer of insurance risks as well.
Captive insurance companies may be defined as limited-purpose insurance companies established with the specific objective of financing risks emanating from their parent group or groups. This definition can sometimes be extended to include some of the risks of the parent company's customers. In short, it is an in-house self-insurance vehicle. Captives may take the form of a "pure" entity (which is a 100% 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
Neither insurance consultants nor insurance brokers are insurance companies and no risks are transferred to them in insurance transactions. Third party administrators are companies that perform underwriting and sometimes claims handling services for insurance companies. These companies often have special expertise that the insurance companies do not have.
The financial stability and strength of an insurance company should be a major consideration when buying an insurance contract. An insurance premium paid currently provides coverage for losses that might arise many years in the future. For that reason, the viability of the insurance carrier is very important. In recent years, a number of insurance companies have become insolvent, leaving their policyholders with no coverage (or coverage only from a government-backed insurance pool or other arrangement with less attractive payouts for losses). A number of independent rating agencies provide information and rate the financial viability of insurance companies.
Across the world
Global insurance premiums grew by 2.7% in inflation-adjusted terms in 2010 to $4.3 trillion, climbing above pre-crisis levels. The return to growth and record premiums generated during the year followed two years of decline in real terms. Life insurance premiums increased by 3.2% in 2010 and non-life premiums by 2.1%. While industrialised countries saw an increase in premiums of around 1.4%, insurance markets in emerging economies saw rapid expansion with 11% growth in premium income. The global insurance industry was sufficiently capitalised to withstand the financial crisis of 2008 and 2009 and most insurance companies restored their capital to pre-crisis levels by the end of 2010. With the continuation of the gradual recovery of the global economy, it is likely the insurance industry will continue to see growth in premium income both in industrialised countries and emerging markets in 2011.
Advanced economies account for the bulk of global insurance. With premium income of $1.62 trillion, Europe was the most important region in 2010, followed by North America $1.409 trillion and Asia $1.161 trillion. Europe has however seen a decline in premium income during the year in contrast to the growth seen in North America and Asia. The top four countries generated more than a half of premiums. The United States and Japan alone accounted for 40% of world insurance, much higher than their 7% share of the global population. Emerging economies accounted for over 85% of the world's population but only around 15% of premiums. Their markets are however growing at a quicker pace.[37] The country expected to have the biggest impact on the insurance share distribution across the world is China. According to Sam Radwan of ENHANCE International LLC, low premium penetration (insurance premium as a % of GDP), an ageing population and the largest car market in terms of new sales, premium growth has averaged 15–20% in the past five years, and China is expected to be the largest insurance market in the next decade or two.[38]
Regulatory differences
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.[39] The National Conference of Insurance Legislators (NCOIL) also works to harmonize the different state laws.[40]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.[41] As far as insurance in the United Kingdom, the Financial Services Authority took over insurance regulation from the General Insurance Standards Council in 2005;[42] laws passed include the Insurance Companies Act 1973 and another in 1982,[43] and reforms to warranty and other aspects under discussion as of 2012[update].[44]
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[45] 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.[46]
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.
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 called 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. 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.[Insurance insulates too much
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.[47] To reduce their own financial exposure, insurance companies have contractual clauses that mitigate their obligation to provide coverage if the insured engages in behavior that grossly magnifies their risk of loss or liability.[For example, life insurance companies may require higher premiums or deny coverage altogether to people who work in hazardous occupations or engage in dangerous sports. Liability insurance providers do not provide coverage for liability arising from intentional torts committed by or at the direction of the insured. Even if a provider desired to provide such coverage, it is against the public policy of most countries to allow such insurance to exist, and thus it is usually illegal
Complexity of insurance policy contracts
9/11 was a major insurance loss, but there were disputes over the World Trade Center's insurance policy
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 towards 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.[48]Redlining
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.[49]In July 2007, The 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.[50] 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.[51]
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.[52]
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.[citation needed] 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: Old 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.
Insurance patents
New assurance products can now be protected from copying with a business method patent in the United States.A recent example of a new insurance product that is patented is Usage Based auto 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 (EP 0700009).
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.[53]
Inventors can now have their insurance US patent applications reviewed by the public in the Peer to Patent program.[54] The first insurance patent to be granted was [55] including another example of an application posted was US2009005522 "risk assessment company". It was posted on March 6, 2009. This patent application describes a method for increasing the ease of changing insurance companies.[56]
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.[citation needed] 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. Under United States tax law, for example, most owners of variable annuities and variable life insurance can invest their premium payments in the stock market and defer or eliminate paying any taxes on their investments until withdrawals are made. Sometimes this tax deferral is the only reason people use these products.[citation needed] Another example is the legal infrastructure which allows life insurance to be held in an irrevocable trust which is used to pay an estate tax while the proceeds themselves are immune from the estate tax.Religious concer
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[57] (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.[58] Jewish rabbinical scholars also have expressed reservations regarding insurance as an avoidance of God's will but most find it acceptable in moderation.[59]Some Christians believe insurance represents a lack of faith[citation needed] 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
XXX . V000000 On the Influence of Mathematics and Informatics on the Modern Insurance Industry
The development of modern life assurance started in the year 1693 when Edmond Halley published the first mortality tables based on reliable empirical data. Since then, there has always been a direct and intimate relation between mathematics on the one hand and the insurance business — not restricted to personal insurance — on the other hand. In particular the models and methods of risk theory, developed in the 20th century and based on probability theory and mathematical statistics, have made it possible to describe substantial parts of the insurance business quantitatively, thus providing a sound basis for managerial decisions like premium calculation, reservation and the type and size of reinsurance. The emergence of informatics or computer science in the past two or three decades has influenced the insurance industry in two ways. On the one side, computers allow of complicated and large-scale numerical calculations. On the other side, the use of electronic data processing has revolutionized the administration of the whole insurance business.
The development of insurance mathematics
Insurance mathematics (or actuarial mathematics - but this tenn is sometimes restricted to the
mathematics of life or personal insurance) is the body of mathematical models and methods used
and applied in the insurance business. Some of these techniques have been created and developed
especially for that purpose, e.g. mortality tables and experience rating procedures, others have
been adapted from mathematical theory or other fields of application, e.g. stochastic processes,
statistics and game theory. As a timely and elegant introduction into life insurance mathematics
we recommend Gerber (1990), a textbook in risk theory is Heilmann (1988), and a good survey
of actuarial mathematics with many practical examples is given by Panjer (1986).
Usually the date of the beginning of actuarial science is fixed as 1693. In that year, Edmond
Halley published" An Estimate of the Degree of the Mortality of Mankind, Drawn from Various
Tables of Births and Funerals in the City of Breslau". This paper contained a tabular display
which was the fIrst mortality table based on empirical exploration. By this, the fIrst and most
specific basis of calculation in life insurance was established. The other bases of calculation in
life insurance are the rate of interest and the expense loadings.
Since then, the establishment, improvement and refmement of tables containing the probabilities
for the occurence of certain events has been a major task of actuaries. Such events are
death, disability, retirement, sickness or marriage, e.g. With every new type of insurance cover
in personal insurance, the necessity of constructing a new kind of contingency table arises. Recent
examples are the insurance of nursing expenses (long tenn care) and the dread diseases cover.
The mathematical tools for constructing such tables are taken from statistics, demography
and numerical analysis. A special technique used in this area is graduation, the process of
obtaining, from an irregular set of observed values, a corresponding smooth set of values
consistent in a general way with the observed values.
The use of tenns like frequency and probability in mortality table analysis should not give
the impression that Halley and his first successors made use of probabilistic models. In fact there
were no such models, and notions like random variable, expected value or variance did not exist
But the 17th century saw the beginning of both probability theory and actuarial mathematics,
and after almost two centuries of parallel development the two approaches fmally got into touch
- a connection which proved useful and fruitful for both sides. Some of the most notable jumps
ahead in the early years were the following.
From a scientific point of view, the insurance industry is mainly based on economics, jurisprudence
and mathematics. Other disciplines contributing to the foundations or to the practice of
insurance are medicine, engineering sciences and, increasingly, computer science. But from the
very beginning of modem insurance industry in the late 17th century, mathematics has been the
most important and, in many branches of insurance, an even indispensable tool for the creation
and administration of insurance products. Or, to put it in other words: Insurance is the classical
and has been for a long time the dominant field of application of mathematics in economics.
This is mainly due to the following facts. Firstly, the insurance business rests heavily upon
sound and reliable bases of calculation, i.e. mortality, interests and costs. Secondly, the primary
obligation of the insurer is to build up and form a collective of insurance contracts in which there
is a stability or balance in time and by number. In "classical" lines of insurance like life, health
and motor insurance, this stability was guaranteed by the law of large numbers, and it was not
unreasonable to state that the law oflarge numbers was the "law of production" in insurance.
Nowadays, an insurer is often faced with new risks without much claim experience, with
small collectives and short periods insured. Then he or she rely on risk management techniques
which tell him or her whether to accept or reject a risk and how to spread a risk by fixing a
retention for the insured, by limiting the liability and by purchasing reinsurance cover, e.g.
But these decisions and their consequences can be and in many cases are or even have to
he based on calculations and lines of mathematical reasoning, too. So the profession of a
mathematician, or actuary, is of utmost importance in the insurance industry and has been the
main occupation for mathematicians in the private industry for a long time.
Moreover, the mathematicians - in particular the chief mathematicians in life assurance
companies - playa substantial role in the area of supervision and regulation. Especially in those
countries with a "normative" approach to life insurance supervision like the U.K. or Ireland (in
contrast to the "prescriptive" or "substantive" approach in Germany, e.g.) the responsibility
and the professional judgement of the actuary make him or her a key person in the system of
supervision. In the forthcoming European national market the model of the British "Appointed
Actuary" will probably be followed in most partner countries, cf. Daykin (1991).
Naturally, the influence and the importance of infonnaticsin the insurance industry have
emerged only in the past few decades, but the appearance of computers has made a tremendous
impact on the whole business ever since. In this paper we shall focus on the following two effects
of the use of electronic data processing and computers: the flexibility and variety it renders to
the different products and tariffs of insurance, and the feasibility of complicated calculation
procedures by means of high-speed computers with large memory storage capacity. Another
important issue is of course that the computer in service enterprises plays a role similar to the
assembly line in manufacturing plants, thus giving rise to rationalization measures and creating
capacities for expansion and diversification of production.
In the subsequent sections we shall describe and discuss the preceding ideas and issues in
greater detail.
=== MA THEREFORE INSURANCE ELECTRONICS UN TO AGENT A ROBOT ===
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