introduction to insuranc1

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DIFFERENT SCHEMES & POLICES OF INSURANCE S.I.W.S.

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INTRODUCTION TO STUDY

INTRODUCTION TO INSURANCE

Insurance is a form ofrisk management primarily used to hedge against the riskofa contingent, uncertain loss. Insurance is defined as the equitable transfer of therisk of a loss, from one entity to another, in exchange for payment. An insurer is acompany selling the insurance; the insured, or policyholder, is the person or entity

buying the insurance policy. The amount to be charged for a certain amount ofinsurance coverage is called the premium. Risk management, the practice ofappraising and controlling risk, has evolved as a discrete field of study and

practice. The transaction involves the insured assuming a guaranteed and knownrelatively small loss in the form of payment to the insurer in exchange for theinsurer's promise to compensate (indemnify) the insured in the case of a financial(personal) loss. The insured receives a contract, called the insurance policy, whichdetails the conditions and circumstances under which the insured will befinancially compensated. Insurance is a form of risk management in which theinsured transfers the cost of potential loss to another entity in exchange formonetary compensation known as thepremium. (For background reading, see The

History Of Insurance In America.) Insurance allows individuals, businesses andother entities to protect themselves against significant potential losses and financia

hardship at a reasonably affordable rate. We say "significant" because if thepotential loss is small, then it doesn't make sense to pay a premium to protectagainst the loss. After all, you would not pay a monthly premium to protect againsta $50 loss because this would not be considered a financial hardship for most.

Insurance is appropriate when you want to protect against a significant monetaryloss. Take life insurance as an example. If you are the primary breadwinner in yourhome, the loss of income that your family would experience as a result of our

premature death is considered a significant loss and hardship that you should

protect them against. It would be very difficult for your family to replace yourincome, so the monthly premiums ensure that if you die, your income will bereplaced by the insured amount. The same principle applies to many other forms ofinsurance. If the potential loss will have a detrimental effect on the person orentity, insurance makes sense.

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History of insurance

In some sense we can say that insurance appears simultaneously with theappearance of human society. We know of two types of economies in human

societies: natural or non-monetary economies (using barter and trade with nocentralized nor standardized set of financial instruments) and more modernmonetary economies (with markets, currency, financial instruments and so on).The former is more primitive and the insurance in such economies entailsagreements of mutual aid. If one family's house is destroyed the neighbours arecommitted to help rebuild. Granaries housed another primitive form of insurance toindemnify against famines. Often informal or formally intrinsic to local religiouscustoms, this type of insurance has survived to the present day in some countrieswhere modern money economy with its financial instruments is not widespread

Turning to insurance in the modern sense (i.e., insurance in a modern moneyeconomy, in which insurance is part of the financial sphere), early methods oftransferring or distributing risk were practised by Chinese and Babylonian tradersas long ago as the 3rd and 2nd millennia BC, respectively. Chinese merchantstravelling treacherous river rapids would redistribute their wares across manyvessels to limit the loss due to any single vessel's capsizing. The Babyloniansdeveloped a system which was recorded in the famous Code of Hammurabi, c1750 BC, and practised by early Mediterranean sailing merchants. If a merchantreceived a loan to fund his shipment, he would pay the lender an additional sum inexchange for the lender's guarantee to cancel the loan should the shipment be

stolen or lost at sea. Achaemenian monarchs of Ancient Persia were the first toinsure their people and made it official by registering the insuring process ingovernmental notary offices. The insurance tradition was performed each year in

Norouz (beginning of the Iranian New Year); the heads of different ethnic groupsas well as others willing to take part, presented gifts to the monarch. The mostimportant gift was presented during a special ceremony. When a gift was worthmore than 10,000 Derrik (Achaemenian gold coin) the issue was registered in aspecial office. This was advantageous to those who presented such special gifts.For others, the presents were fairly assessed by the confidants of the court. Then

the assessment was registered in special offices. The purpose of registering wasthat whenever the person who presented the gift registered by the court was introuble, the monarch and the court would help him. Jahez, a historian and writerwrites in one of his books on ancient Iran: "[W]henever the owner of the present isin trouble or wants to construct a building, set up a feast, have his children marriedetc. the one in charge of this in the court would check the registration. If the

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registered amount exceeded 10,000 Derrik, he or she would receive an amount oftwice as much."

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CAUSES OF INSURANCE

Insurers Insolvency Forms

Valid Insolvency of the Exigible Debts by Cash (Liquid Fund Crisis)

This form of insurers insolvency is the correspondent of the insolvency state

in the general insolvency regulation and we find, in this cause of the insurers

bankruptcy, the conditions of the insolvency in the general regulation: incapacityof payment and non-payment of the due dates so that we will reveal herein belowonly.Patrimonial balance or the equality situation of the patrimonial assets and

liabilities; In the same sense: Radu N. Catana, Insurance Law. Insurance ActivityRegulation. General Theory of the Insurance Contract, quoted work, p.87;

the specific aspects thereof. As resulting from the text of art. 3 letter j item 1 inLaw no. 503/2004, the defining elements of the insolvency of the insurancecompany are the non-payment of the exigible debts and the obvious paymentincapacity. The prudential requirements dedicated to the insurers liquidity and itssituation in reference to these requirements constitute the specific aspects of theinsurers insolvency in a manner that is similar to the one encountered in terms of

banks. The importance of these aspects is revealed particularly under the aspect of

proving the existence of the insurers insolvency. The insurers activity is subjectto the liquidity risk23 and, for this reason, the prudential norms determine thecoverage modes of this risk by regulations on the insurers financial investmentsand by the establishment of the liquidity coefficient as a criterion of thedetermination of the insurers capacity to cover the liquidity risk.The liquiditycoefficient represents the ratio of the insurers liquid assets24 and

short-term liabilities towards the insured and indicates the liquidity risk coverage

degree. In this respect, the insurer is bound to have the liquidity coefficient for the

general insurance activity and for the life insurances of at least 1 (one)25 situation

in which the value of the liquid assets is equal to the quantum of the short-termliabilities.According to the law, the insurers short-term liabilities towards theinsured are represented by the gross damage reserve but, on the one hand, thisreserve is constituted by the insurer under the form of assets as well and, on theother hand, the insurers exigible debts consider other liabilities too, not only theones towards the insured. Under these circumstances, the same as in the case of the

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regular trading companies, reasonable the short-term payment obligations or fromthe difficult collection of the receivables in the

Decrease of the available solvency margin value below half the

minimal limit stipulated by the legal regulations for the security fund

(solvency crisis)

The insurers financial stability, a priority of both the insurer and the

supervisory board, is mainly provided by the appropriate coverage of the risks

undertaken and guaranteed and of those afferent to its investment activity.Thus, the insurer is bound to cumulatively the paid share capital and the minimal

solvency margin.In fact, the insurer is bound to hold, at any moment, the availablesolvency margin30 at least at the level of the minimal solvency margin calculatedfor each operated class of insurances .Essentially, for the general insurances, theminimal solvency margin is determined either by reference to the value of thegross premiums subscribed over the last 12 calendar months, or by reference to theannual average of the gross damages paid over the last 36 calendar months.

For the life insurances, the minimal solvency margin represents a certain

percentage of the mathematical reserves.The available insolvency marginrepresenting the positive difference between the assets and the liabilities certainand the ones that may materialize in the future (net assets)31, the insurers capacityto cover its losses without resorting to the equity should exceed or at least be equalto the minimal solvency margin. According to the law, one third of the minimalsolvency margin should constitute the security fund that should have a minimalvalue equivalent to 3.5 million .Euro for the life insurance and a minimal valueequivalent to 2.3 million Euro for the general insurances. If the insurer subscribesone or several risks ranged in classes 10,of the security fund will be the equivalentin lei of 3.5 million Euro33.Thus, as said, the available solvency margin represents

the main indicator of the insurers financial health, its capacity to cover theunexpected losses so that its decrease below the minimal value set out by the

prudential norms (below the value of the minimal solvency margin) indicatesfinancial problems of the company, under the form of solvency crisis.

Under these circumstances, the decrease of the solvency margin below half the

minimal limit set out by the legal regulations for the security fund indicates a

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profound solvency crisis, an irremediably compromised financial situationrequiring the initiation of the bankruptcy procedure. This form of the insurersinsolvency may be accompanied or not by a liquidity crisis and may be

independent from the actual ratio of the insurers assets and liabilities.Thepossibility that the future debts, unpredicted loss may not be covered is

maximal and, for this reason, the solvency crisis represents the cause of applicationof the insurers bankruptcy procedure.The insurers insolvency, under the form ofthe solvency crisis will be provided by the Insurance Supervisory Board byspecific documents: the financial statement,

Types of insurance

Any risk that can be quantified can potentially be insured. Specific kinds of riskthat 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 policymay 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 tothe vehicle) and the liability risk (legal claims arising from an accident). A homeinsurance policy in the US typically includes coverage for damage to the home andthe owner's belongings, certain legal claims against the owner, and even a smallamount 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.

Given below are details on the 6 different types of insurance:

Auto Insurance: Under the policies of auto insurance, coverage is provided forany damage caused by accidents. The insured needs to pay an amount on amonthly basis to the insurer who in turn provides compensation to the insured incase of accident and mishaps. There are 3 types of auto insurance coverage

liability coverage, physical damage coverage and uninsured and underinsuredmotorist coverage. Car insurance comparison is important in order to achievecheap car insurance quotes that will help you to buy your most suitable policy.

Life Insurance: Life insurance is a plan which provides protection to the insuredand his family with financial coverage in case of any mishaps. To avail the benefits

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of life insurance policy, the policy holder has to pay a monthly premium to theinsurer for a certain period of time.

Health Insurance: Under this type of health care cover, medical expenses are

covered. When an insured person needs medical treatment due to illness oraccident, the insurance agent provides coverage for his expenses such as doctorfees, hospital fees, medicine cost and other related bills.

Home Insurance: The most popular among the 6 types of insurance is the homeinsurance that provides compensation for any mishaps that occurs on your home.Coverage is provided according to the policy and premium paid by thehomeowner. There are various types of home insurance plans that you can choose

from to suit your needs.Disability Insurance: Disability insurance is the financial coverage provided to aninsured individual when he looses his ability to work due to any illness or accidentThere are two types of disability policies: Short Term Disability (STD) and LongTerm Disability (LTD). In short term disability, compensation is provided for a

period of maximum 2 years. On the other hand, if you avail the long term disabilityplan, you can get benefits for the rest of your life.

Business Insurance: If you have a business organization, be it small or big, youshould always opt for business insurance policies to protect it from any mishaps.

Under business insurance, you can avail policies that provide coverage for businessproperty and liability. The most popular business insurance policy that is availedby various business concerns is BOP (businessowners policy). BOP is a packagethat provides coverage for property insurance, business interruption insurance andliability protection.

Before you invest in any of the 6 types of insurance, get detailed information frominsurance agents so that you do not face any unwanted problems later

Life Insurance

Life Insurance is a contract providing for payment of a sum of money to theperson assured or, following him to the person entitled to receive the same, on thehappening of a certain event. It is a good method to protect your familyfinancially, in case of death, by providing funds for the loss of income.

TERM LIFE INSURANCE : Under a Term Life contract, the insurancecompany pays a specific lump sum to the designated beneficiary in case of thedeath of the insured. These policies are usually for 5, 10, 15, 20 or 30years.Term life insurance are the most popular in advance countries but were not

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so popular in India. However, after the entry of the private operators andaggressive marketing by few players this kind of policies are becoming popular.The premium on such type of policies is comparatively quite low when compared

with other types of life insurance policies, mainly due to the fact that thesepolicies do not carry cash value.

PLUS OF TERM LIFE INSURANCEMINUSES OF TERM LIFE

INSURANCE

- The premium payable on these policies

is low as they do not carry any cashvalue.

- One can afford for quite high valueinsurance policies

- If one survives the period of the policyhe / she does not get any money at the enof the policy.

The premium on such policies keeps oincreasing with age mainly because thrisk of death of older people is more. Ovethe page of 60, these policies becomdifficult to afford.

PERMANENT LIFE INSURANCE :

In a Permanent Life contract, a portion of the money paid as premiums isinvested in a fund that earns interest on a tax-deferred basis. Thus, over a period oftime, this policy will accumulate certain "cash value" which you will be able to get

back either during the period of the policy or at the end of the policy.Your need forlife insurance can change over a lifetime. At any age, you should consider yourindividual circumstances and the standard of living you wish to maintain for yourdependents. In most cases, you need life insurance only if someone depends on youfor support. Your life insurance premium is based on the type of insurance you

buy, the amount you buy and your chance of death while the policy is in effect.This type of policy not only provides protection for your dependents by paying adeath benefit to your designated beneficiary upon your death, but it also allows youto use some part of the money while you are alive or at the end of the policy.

Some examples of such policies are :- Whole Life, Universal Life and Variable-Universal Life.

ENDOWMENT POLICIES:These policies provide for period payment ofpremiums and a lump sum amount either in the event of death of the insured or onthe date of expiry of the policy, whichever occurs earlier.

MONEY BACK POLICIES:These policies provide for periodic payments ofpartial survival benefits during the term of the policy itself. A unique feature

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associated with this type of policies is that in the event of death of the insuredduring the policy term, the designated beneficiary will get the full sum assuredwithout deducting any of the survival benefit amounts, which have already been

paid as money-back components. Moreover, the bonus on such policies is alsocalculated on the full sum assured.

ANNUITY / PENSION POLICIES / FUNDS:This policies / funds require theinsured to pay the premium as a single lump sum or through installments paid overa certain number of years. The insured in return will receive back a specific sum

periodically from a specified date onwards (the returns can can be monthly, halfyearly or annually), either for life or for a fixed number of years. In case of thedeath of the insured, or after the fixed annuity period expires for annuity paymentsthe invested annuity fund is refunded, usually with some additional amounts as per

the terms of the policy.Annuities / Pension funds are different from from all other forms of life insuranceas an annuity policy / fund does not provide any life insurance cover but merelyoffers a guaranteed income either for life or a certain period. Therefore, this typeof insurance is taken so as to get income after the retirement.

Auto insurance

Auto insurance protects the policyholder against financial loss in the event of anincident involving a vehicle they own, such as in atraffic collision.

Coverage typically includes:

Property coverage, for damage to or theft of the car;

Liability coverage, for the legal responsibility to others for bodily injury orproperty damage;

Medical coverage, for the cost of treating injuries, rehabilitation andsometimes lost wages and funeral expenses.

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Home insuranceHome insurance provides coverage for damage or destruction of the policyholder'shome. In some geographical areas, the policy may exclude certain types of risks,such as flood or earthquake, that require additional coverage. Maintenance-relatedissues are typically the homeowner's responsibility. The policy may includeinventory, 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 liabilityand legal responsibility for injuries and property damage caused by members of thehousehold, including pets.Health insurance policies cover the cost of medicaltreatments. Dental insurance, like medical insurance protects policyholders fordental costs. In the US and Canada, dental insurance is often part of an employer's

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benefits package

Accident, sickness and unemployment insurance

Workers' compensation, or employers' liability insurance, is compulsory in some

countries

Disability insurance policies provide financial support in the event of thepolicyholder becoming unable to work because of disabling illness or injuryIt provides monthly support to help pay such obligations as mortgage loans

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and credit cards. Short-term and long-term disability policies are available toindividuals, but considering the expense, long-term policies are generallyobtained only by those with at least six-figure incomes, such as doctors,

lawyers, etc. Short-term disability insurance covers a person for a periodtypically 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 longterm, up until such time as they are considered permanently disabled andthereafter. Insurance companies will often try to encourage the person backinto employment in preference to and before declaring them unable to workat 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 takenas an adjunct to life insurance.

Workers' compensation insurance replaces all or part of a worker's wageslost and accompanying medical expenses incurred because of a job-relatedinjury.

LIFE INSURANCE

Life insurance provides a monetary benefit to a decedent's family or otherdesignated beneficiary, and may specifically provide for income to an insured

person's family, burial, funeral and other final expenses. Life insurance policiesoften allow the option of having the proceeds paid to the beneficiary either in alump sum cash payment or an annuity.

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Annuities provide a stream of payments and are generally classified as insurancebecause they are issued by insurance companies, are regulated as insurance, andrequire the same kinds of actuarial and investment management expertise that life

insurance requires. Annuities andpensions that pay a benefit for life are sometimesregarded as insurance against the possibility that a retiree will outlive his or herfinancial 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 theinsured if the policy is surrendered or which may be borrowed against. Some

policies, such as annuities and endowment policies, are financial instruments toaccumulate orliquidatewealth when it is needed.

In many countries, such as the US and the UK, the tax law provides that the

interest on this cash value is not taxable under certain circumstances. This leads towidespread use of life insurance as a tax-efficient method of saving as well as

protection in the event of early death.

In the US, the tax on interest income on life insurance policies and annuities isgenerally deferred. However, in some cases the benefit derived from tax deferralmay be offset by a low return. This depends upon the insuring company, the typeof policy and other variables (mortality, market return, etc.). Moreover, otherincome tax saving vehicles (e.g., IRAs, 401(k) plans, Roth IRAs) may be betteralternatives for value accumulation.

Burial insurance

Burial insurance is a very old type of life insurance which is paid out upon death tocover final expenses, such as the cost of a funeral. The Greeks and Romansintroduced burial insurance circa 600 AD when they organized guilds called"benevolent societies" which cared for the surviving families and paid funeraexpenses of members upon death. Guilds in the Middle Ages served a similar

purpose, as did friendly societies during Victorian times.

Property

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This tornado damage to an Illinois home would be considered an "Act of God" for

insurance purposes

Property insurance provides protection against risks to property, such as fire, theftorweather damage. This may include specialized forms of insurance such as fireinsurance, flood insurance, earthquake insurance, home insurance, inland marineinsurance orboiler insurance. The term property insurance may, like casualtyinsurance, be used as a broad category of various subtypes of insurance, some ofwhich are listed below:

US Airways Flight 1549 was written offafter ditching into the Hudson River

Aviation insuranceprotects aircraft hulls and spares, and associated liabilityrisks, such as passenger and third-party liability. Airports may also appearunder this subcategory, including air traffic control and refuelling operationsfor international airports through to smaller domestic exposures.

Boiler insurance (also known as boiler and machinery insurance, orequipment breakdown insurance) insures against accidental physical damageto boilers, equipment or machinery.

Builder's risk insurance insures against the risk of physical loss or damage toproperty during construction. Builder's risk insurance is typically written onan "all risk" basis covering damage arising from any cause (including thenegligence of the insured) not otherwise expressly excluded. Builder's riskinsurance is coverage that protects a person's or organization's insurableinterest in materials, fixtures and/or equipment being used in the

construction or renovation of a building or structure should those itemssustain physical loss or damage from an insured peril.

Crop insurance may be purchased by farmers to reduce or manage variousrisks associated with growing crops. Such risks include crop loss or damagecaused by weather, hail, drought, frost damage, insects, or disease.[22]

Earthquake insurance is a form of property insurance that pays thepolicyholder in the event of an earthquake that causes damage to the

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property. Most ordinary home insurance policies do not cover earthquakedamage. Earthquake insurance policies generally feature a high deductibleRates 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. Itusually insures a business for losses caused by the dishonest acts of itsemployees.

Fire aboard MV Hyundai Fortune

Marine insurance and marine cargo insurance cover the loss or damage ofvessels at sea or on inland waterways, and of cargo in transit, regardless ofthe method of transit. When the owner of the cargo and the carrier are

separate corporations, marine cargo insurance typically compensates theowner of cargo for losses sustained from fire, shipwreck, etc., but excludeslosses that can be recovered from the carrier or the carrier's insurance. Manymarine insurance underwriters will include "time element" coverage in such

policies, which extends the indemnity to cover loss of profit and otherbusiness expenses attributable to the delay caused by a covered loss.

Supplemental natural disaster insurance covers specified expenses after anatural 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.

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The demand for terrorism insurance surged after9/11

Terrorism insuranceprovides protection against any loss or damage causedby terrorist activities. In the US in the wake of 9/11, the Terrorism RiskInsurance Act 2002 (TRIA) set up a federal Program providing a transparentsystem of shared public and private compensation for insured lossesresulting from acts of terrorism. The program was extended until the end of2014 by the Terrorism Risk Insurance Program Reauthorization Act 2007(TRIPRA).

Volcano insurance is a specialized insurance protecting against damagearising specifically from volcanic eruptions.

Windstorm insurance is an insurance covering the damage that can becaused by wind events such as hurricanes.

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LiabilityLiability insurance is a very broad superset that covers legal claims against theinsured. Many types of insurance include an aspect of liability coverage. Forexample, a homeowner's insurance policy will normally include liability coveragewhich protects the insured in the event of a claim brought by someone who slipsand falls on the property; automobile insurance also includes an aspect of liabilityinsurance that indemnifies against the harm that a crashing car can cause to otherslives, health, or property. The protection offered by a liability insurance policy istwofold: a legal defense in the event of a lawsuit commenced against the

policyholder and indemnification (payment on behalf of the insured) with respectto a settlement or court verdict. Liability policies typically cover only thenegligence of the insured, and will not apply to results of wilful or intentional acts

by the insured.

The subprime mortgage crisis was the source of many liability insurance

losses.Public 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.Environmenta

liability insurance protects the insured from bodily injury, property damage and

cleanup costs as a result of the dispersal, release or escape of pollutants. Errors and

omissions insurance 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

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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 calledprofessional indemnity insurance

Credit

Credit insurance repays some or all of a loan when certain circumstances arise tothe borrower such as unemployment, disability, ordeath.

Mortgage insurance insures the lender against default by the borrowerMortgage insurance is a form of credit insurance, although the name "creditinsurance" more often is used to refer to policies that cover other kinds ofdebt.

Many credit cards offer payment protection plans which are a form of creditinsurance.

Accounts Receivable insurance also known as Credit or Trade Credit insurance is

business insurance over the accounts receivables of the insured. The policy

pays the policy holder for covered accounts receivable if the debtor defaults

on payment

Casualty

Casualty insurance insures against accidents, not necessarily tied to any specificproperty. It is a broad spectrum of insurance that a number of other types ofinsurance could be classified, such as auto, workers compensation, and someliability insurances.

Crime insurance is a form of casualty insurance that covers the policyholderagainst losses arising from the criminal acts of third parties. For example, acompany can obtain crime insurance to cover losses arising from theft orembezzlement.

Political risk insurance is a form of casualty insurance that can be taken outby businesses with operations in countries in which there is a risk thatrevolution or otherpolitical conditions could result in a loss.

All-risk insurance is an insurance that covers a wide-range of incidents andperils, except those noted in the policy. All-risk insurance is different fromperil-specific insurance that cover losses from only those perils listed in thepolicy. In car insurance, all-risk policy includes also the damages caused bythe own driver.

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Other types

High-value horses may be insured under a bloodstock policy

Bloodstock insurance covers individual horses or a number of horses undercommon ownership. Coverage is typically for mortality as a result ofaccident, illness or disease but may extend to include infertility, in-transitloss, veterinary fees, and prospective foal.

Business interruption insurance covers the loss of income, and the expensesincurred, after a covered peril interrupts normal business operations.

Collateral protection insurance (CPI) insures property (primarily vehicles)held as collateral for loans made by lending institutions.

Defense Base Act (DBA) insurance provides coverage for civilian workershired by the government to perform contracts outside the US and Canada.DBA is required for all US citizens, US residents, US Green Card holdersand all employees or subcontractors hired on overseas government contracts

Depending on the country, foreign nationals must also be covered underDBA. This coverage typically includes expenses related to medicaltreatment and loss of wages, as well as disability and death benefits.

Expatriate insurance provides individuals and organizations operatingoutside of their home country with protection for automobiles, propertyhealth, liability and business pursuits.

Kidnap and ransom insurance is designed to protect individuals andcorporations operating in high-risk areas around the world against the perilsof kidnap, extortion, wrongful detention and hijacking.

Legal expenses insurance covers policyholders for the potential costs oflegal action against an institution or an individual. When something happenswhich triggers the need for legal action, it is known as "the event". There aretwo main types of legal expenses insurance:before the event insurance andafter the event insurance.

Locked funds insurance is a little-known hybrid insurance policy jointlyissued by governments and banks. It is used to protect public funds from

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tamper by unauthorized parties. In special cases, a government mayauthorize its use in protecting semi-private funds which are liable to tamper.The terms of this type of insurance are usually very strict. Therefore it is

used only in extreme cases where maximum security of funds is required.

Livestock insurance is a specialist policy provided to, for examplecommercial or hobby farms, aquariums, fish farms or any other animaholding. Cover is available for mortality or economic slaughter as a result ofaccident, illness or disease but can extend to include destruction bygovernment 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 nationallevel. (See the nuclear exclusion clause and for the US the Price-Anderson

Nuclear Industries Indemnity Act.)

Pet insurance insures pets against accidents and illnesses; some companiescover routine/wellness care and burial, as well.

Pollution insurance usually takes the form of first-party coverage forcontamination of insured property either by external or on-site sources

Coverage is also afforded for liability to third parties arising fromcontamination of air, water, or land due to the sudden and accidental releaseof hazardous materials from the insured site. The policy usually covers thecosts of cleanup and may include coverage for releases from undergroundstorage tanks. Intentional acts are specifically excluded.

Purchase insurance is aimed at providing protection on the products peoplepurchase. Purchase insurance can cover individual purchase protectionwarranties, guarantees, care plans and even mobile phone insurance. Suchinsurance is normally very limited in the scope of problems that are covered

by the policy.

Title insuranceprovides a guarantee that title to real property is vested in thepurchaser and/ormortgagee, free and clear of liens or encumbrances. It isusually issued in conjunction with a search of the public records performedat the time of a real estate transaction.

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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

Insurance financing vehiclesFraternal insurance is provided on a cooperative basis by fraternal benefit societiesor other social organizations. No-fault insurance is a type of insurance policy(typically automobile insurance) where insureds are indemnified by their own

insurer regardless of fault in the incident.Protected self-insurance is an alternativerisk financing mechanism in which an organization retains the mathematicallycalculated cost of risk within the organization and transfers the catastrophic riskwith specific and aggregate limits to an insurer so the maximum total cost of the

program is known. A properly designed and underwritten Protected Self-InsuranceProgram reduces and stabilizes the cost of insurance and provides valuable riskmanagement information. Retrospectively rated insurance is a method ofestablishing a premium on large commercial accounts. The final premium is basedon the insured's actual loss experience during the policy term, sometimes subject to

a minimum and maximum premium, with the final premium determined by aformula. 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 oryears beyond the current year's expiration date. The rating formula is guaranteed inthe insurance contract. Formula: retrospective premium = converted loss + basic

premium tax multiplier. Numerous variations of this formula have beendeveloped and are in use. Formal self insurance is the deliberate decision to pay for

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otherwise insurable losses out of one's own money. This can be done on a formalbasis by establishing a separate fund into which funds are deposited on a periodicbasis, 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-severitylosses. Such losses, if covered by conventional insurance, mean having to pay a

premium that includes loadings for the company's general expenses, cost of puttingthe policy on the books, acquisition expenses, premium taxes, and contingencies.While this is true for all insurance, for small, frequent losses the transaction costsmay exceed the benefit of volatility reduction that insurance otherwise affordsReinsurance is a type of insurance purchased by insurance companies or self-insured employers to protect against unexpected losses. Financial reinsurance is aform of reinsurance that is primarily used for capital management rather than to

transfer insurance risk. Social insurance can be many things to many people inmany countries. But a summary of its essence is that it is a collection of insurancecoverages (including components of life insurance, disability income insuranceunemployment insurance, health insurance, and others), plus retirement savingsthat requires participation by all citizens. By forcing everyone in society to be a

policyholder and pay premiums, it ensures that everyone can become a claimantwhen or if he/she needs to. Along the way this inevitably becomes related to otherconcepts such as the justice system and the welfare state.

Closed community self-insurance

Some communities prefer to create virtual insurance amongst themselves by othermeans than contractual risk transfer, which assigns explicit numerical values torisk. A number ofreligious 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 allbear the cost of rebuilding lost property and supporting people whose needs aresuddenly greater after a loss of some kind. In supportive communities where otherscan 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 insurabilitythat exist among its members. Some further justification is also provided by

invoking the moral hazard of explicit insurance contracts.

In the INDIA, The Crown (which, for practical purposes, meant the civil service)did not insure property such as government buildings. If a government buildingwas damaged, the cost of repair would be met from public funds because, in thelong run, this was cheaper than paying insurance premiums. Since many UK

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government buildings have been sold to property companies, and rented back, thisarrangement is now less common and may have disappeared altogether.

Insurance companies

Insurance companies may be classified into two groups:

Life insurance companies, which sell life insurance, annuities and pensionsproducts.

Non-life, general, or property/casualty insurance companies, which sell othertypes of insurance.

General insurance companies can be further divided into these subcategories. Standard lines Excess lines

In most countries, life and non-life insurers are subject to different regulatoryregimes and different tax and accounting rules. The main reason for the distinction

between the two types of company is that life, annuity, and pension business isvery long-term in nature coverage for life assurance or a pension can cover risksover many decades. By contrast, non-life insurance cover usually covers a shorter

period, such as one year.In the United States, standard line insurance companiesare "mainstream" insurers. These are the companies that typically insure autos,

homes or businesses. They use pattern or "cookie-cutter" policies without variationfrom one person to the next. They usually have lower premiums than excess linesand can sell directly to individuals. They are regulated by state laws that canrestrict the amount they can charge for insurance policies.Excess line insurancecompanies (also known as Excess and Surplus) typically insure risks not covered

by the standard lines market. They are broadly referred as being all insuranceplaced with non-admitted insurers. Non-admitted insurers are not licensed in the

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states where the risks are located. These companies have more flexibility and canreact faster than standard insurance companies because they are not required to filerates and forms as the "admitted" carriers do. However, they still have substantial

regulatory requirements placed upon them. State laws generally require insuranceplaced with surplus line agents and brokers not to be available through standardlicensed insurers.Insurance companies are generally classified as eithermutual orstock companies. Mutual companies are owned by the policyholders, whilestockholders (who may or may not own policies) own stock insurance companies.Demutualization of mutual insurers to form stock companies, as well as theformation of a hybrid known as a mutual holding company, became common insome countries, such as the United States, in the late 20th century.Other possibleforms for an insurance company include reciprocals, in which policyholders

reciprocate in sharing risks, and Lloyd's organizations.Insurance companies arerated by various agencies such as A. M. Best. The ratings include the company'sfinancial strength, which measures its ability to pay claims. It also rates financialinstruments issued by the insurance company, such as bonds, notes, andsecuritization products.

Reinsurance companies are insurance companies that sell policies to otherinsurance companies, allowing them to reduce their risks and protect themselvesfrom very large losses. The reinsurance market is dominated by a few very largecompanies, with huge reserves. A reinsurer may also be a direct writer of insurancerisks as well.Captive insurance companies may be defined as limited-purpose

insurance companies established with the specific objective of financing risksemanating from their parent group or groups. This definition can sometimes beextended 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 membersof a professional, commercial or industrial association). Captives representcommercial, economic and tax advantages to their sponsors because of the

reductions in costs they help create and for the ease of insurance risk managementand the flexibility for cash flows they generate. Additionally, they may providecoverage of risks which is neither available nor offered in the traditional insurancemarket at reasonable prices.The types of risk that a captive can underwrite for their

parents include property damage, public and product liability, professionaindemnity, employee benefits, employers' liability, motor and medical aidexpenses. The captive's exposure to such risks may be limited by the use of

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reinsurance.Captives are becoming an increasingly important component of therisk management and risk financing strategy of their parent. This can beunderstood against the following background:

heavy and increasing premium costs in almost every line of coverage;difficulties in insuring certain types of fortuitous risk;

differential coverage standards in various parts of the world;

rating structures which reflect market trends rather than individual loss experience;

insufficient credit for deductibles and/or loss control efforts.

There are also companies known as 'insurance consultants'. Like a mortgagebroker, these companies are paid a fee by the customer to shop around for the bestinsurance policy amongst many companies. Similar to an insurance consultant, an'insurance broker' also shops around for the best insurance policy amongst many

companies. However, with insurance brokers, the fee is usually paid in the form ofcommission from the insurer that is selected rather than directly from the client.

Neither insurance consultants nor insurance brokers are insurance companies andno risks are transferred to them in insurance transactions. Third partyadministrators are companies that perform underwriting and sometimesclaims handling services for insurance companies. These companies often havespecial expertise that the insurance companies do not have.

Objectives

To run College and conduct examinations, oral and written, in insurance theoryand practice and related subjects for awarding certificates, diplomas and degrees tothose interested in insurance. To give oral and postal tuitions, prepare and supplyreading materials and similar other educative methods for encouraging andassisting the study of any subject bearing on any branch of insurance.To offerscholarships, grants and prizes for research or any other educational work bearingon insurance. To ascertain the law and practice relating to all matters connectedwith insurance and to disseminate such knowledge among those interested ininsurance.The activities and programmes of the Institute, among others, assist

people in the insurance Industry, to acquire the skills and expertise to meet thegrowing needs of multiplicity of customers- the objective being to enhanceprofessional insurance service to the millions in this country upon the income ofthe person and the business

History

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The Insurance Institute of India (Regd.) formerly known as Federation ofInsurance Institutes (J.C. Setalvad Memorial) (Regd.) was established in the year1955, for the purpose of promoting Insurance Education & Training in the country

The Institute is a professional body serving the cause of the Insurance Industry.The Institute conducts examinations at three levels: Licentiate, Associateship andFellowship as also examinations Certificate in Foundations of Casualty ActuarialScience (General Insurance) and Certificate in Insurance Salesmanship. I.I.I. is theonly professional insurance institute in India and is a chartered member in the

Institute of Global Insurance Education (IGIE). (www.igie.org) MembershipThe membership of the Institute is through associated Institutes. There are at

present 91 Associated Institutes spread all over the country. The Sri LankaInsurance Institute, The Sri Lanka Insurance Academy and The R.I.C.B. Insurance

Institute, Bhutan are the affiliated Institutes outside India. The members of theAssociated Institutes and the Affiliated Institutes automatically become themembers of the Institute. The Life Insurance Corporation of India, The GeneralInsurance Corporation of India, The New India Assurance Company Ltd., TheOriental Insurance Company Ltd., National Insurance Company Ltd., and UnitedIndia Insurance Company Ltd. are corporate members.

OBJECTIVE OF STUDY

CONTROVERSIES

Insurance insulates too much

In United States, 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. 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.

Complexity of insurance policy contracts

Insurance policies can be complex and some policyholders may not understand all

the fees and coverages included in a policy. As a result, people may buy policies

on unfavorable terms. In response to these issues, many countries have enacted

detailed statutory and regulatory regimes governing every aspect of the insurance

business, including minimum standards for policies and the ways in which they

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may be advertised and sold. 9/11 was a major insurance loss, but there were

disputes over the World Trade Center's insurance 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, it

should be noted that 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. Unlike a broker, who

represents the policyholder, an agent represents the insurance company from whom

the policyholder buys. 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. It should also be noted that agents generally can not

offer as broad a range of selection compared to an insurance broker.

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Limited consumer benefitsIn United States, economists and consumer advocates generally consider insuranceto be worthwhile for low-probability, catastrophic losses, but not for high-

probability, small losses. Because of this, consumers are advised to select highdeductibles and to not insure losses which would not cause a disruption in theirlife. However, consumers have shown a tendency to prefer low deductibles and to

prefer to insure relatively high-probability, small losses over low-probabilityperhaps due to not understanding or ignoring the low-probability risk. This isassociated with reduced purchasing of insurance against low-probability losses

and may result in increased inefficiencies from moral hazard.

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Redlining

Redlining is the practice of denying insurance coverage in specific geographicareas, supposedly because of a high likelihood of loss, while the alleged motivationis unlawful discrimination. Racial profiling orredlining has a long history in the

property insurance industry in the United States. From a review of industryunderwriting and marketing materials, court documents, and research by

government agencies, industry and community groups, and academics, it is clearthat race has long affected and continues to affect the policies and practices of theinsurance industry. In July, 2007, The Federal Trade Commission (FTC) released areport presenting the results of a study concerning credit-based insurance scores inautomobile insurance. The study found that these scores are effective predictors ofrisk. It also showed that African-Americans and Hispanics are substantiallyoverrepresented in the lowest credit scores, and substantially underrepresented inthe highest, while Caucasians and Asians are more evenly spread across the scoresThe credit scores were also found to predict risk within each of the ethnic groupsleading the FTC to conclude that the scoring models are not solely proxies for

redlining. The FTC indicated little data was available to evaluate benefit ofinsurance scores to consumers. The report was disputed by representatives of theConsumer Federation of America, the National Fair Housing Alliance, the NationalConsumer Law Center, and the Center for Economic Justice, for relying on data

provided by the insurance industry. All states have provisions in their rateregulation laws or in their fair trade practice acts that prohibit unfairdiscrimination, often called redlining, in setting rates and making insuranceavailable. In determining premiums and premium rate structures, insurers considerquantifiable 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 topolitical disputes about the ways in which insurers determine premiums andregulatory intervention to limit the factors used.An insurance underwriter's job is toevaluate a given risk as to the likelihood that a loss will occur. Any factor thatcauses a greater likelihood of loss should theoretically be charged a higher rate

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This basic principle of insurance must be followed if insurance companies are toremain solvent. Thus, "discrimination" against (i.e., negative differential treatmentof) potential insureds in the risk evaluation and premium-setting process is a

necessary by-product of the fundamentals of insurance underwriting. For instanceinsurers charge older people significantly higher premiums than they chargeyounger people for term life insurance. Older people are thus treated differentlythan younger people (i.e., a distinction is made, discrimination occurs).

Insurance patents

New assurance products can now be protected from copying with a businessmethod patent in the INDIA.A recent example of a new insurance product that is

patented is Usage Based auto insurance. Early versions were independentlyinvented and patented by a major US auto insurance company, Progressive AutoInsurance and a Spanish independent inventor, Salvador Minguijon Perez .Manyindependent inventors are in favor of patenting new insurance products since itgives them protection from big companies when they bring their new insurance

products to market. Independent inventors account for 70% of the new patentapplications in this area.Many insurance executives are opposed to patentinginsurance products because it creates a new risk for them. The Hartford insurancecompany, 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 secretlawsuit for a type of corporate owned life insurance product invented and patentedby Bancorp.There are currently about 150 new patent applications on insuranceinventions filed per year in the INDIA. The rate at which patents have issued hassteadily risen from 15 in 2002 to 44 in 2006.

The insurance industry and rent-seeking

Certain insurance products and practices have been described as rent-seeking bycritics. That is, some insurance products or practices are useful primarily becauseof legal benefits, such as reducing taxes, as opposed to providing protection againstrisks of adverse events. Under United States tax law, for example, most owners ofvariable annuities and variable life insurance can invest their premium payments inthe stock market and defer or eliminate paying any taxes on their investments untilwithdrawals are made. Sometimes this tax deferral is the only reason people usethese products. Another example is the legal infrastructure which allows life

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insurance to be held in an irrevocable trust which is used to pay an estate tax whilethe proceeds themselves are immune from the estate tax.

Religious concerns

Muslim scholars have varying opinions about insurance. Insurance policies thatearn interest are generally considered to be a form of riba (usury) and someconsider even policies that do not earn interest to be a form of gharar(speculation). Some argue that gharar is not present due to the actuarial science

behind the underwriting. Jewish rabbinical scholars also have expressedreservations regarding insurance as an avoidance of God's will but most find itacceptable in moderation. Some Christians believe insurance represents a lack offaith and there is a long history of resistance to commercial insurance .

Insurance policy

In insurance, the insurance policy is a contract (generally a standard formcontract) between the insurer and the insured, known as the policyholder, whichdetermines the claims which the insurer is legally required to pay. In exchange for

payment, known as the premium, the insurer pays for damages to the insuredwhich are caused by covered perils under the policy language. Insurance contractsare designed to meet specific needs and thus have many features not found in manyother types of contracts. Since insurance policies are standard forms, they feature

boilerplate language which is similar across a wide variety of different types of

insurance policies.The insurance policy is generally an integrated contractmeaning that it includes all forms associated with the agreement between theinsured and insurer.In some cases, however, supplementary writings such as letterssent after the final agreement can make the insurance policy a non-integratedcontract. One insurance textbook states that "courts consider all prior negotiationsor agreements ... every contractual term in the policy at the time of delivery, aswell as those written afterwards as policy riders and endorsements ... with both

parties' consent, are part of written policy".The textbook also states that the policymust refer to all papers which are part of the policy. Oral agreements are subject tothe parol evidence rule, and may not be considered part of the policy. Advertisingmaterials and circulars are typically not part of a policy. Oral contracts pending theissuance of a written policy can occur.

Structure

Early insurance contracts tended to be written on the basis of every single type ofrisk (where risks were defined extremely narrowly), and a separate premium wascalculated and charged for each. This structure proved unsustainable in the context

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of the Second Industrial Revolution, in that a typical large conglomerate mighthave dozens of types of risks to insure against.

In the 1940s, the insurance industry shifted to the current system where covered

risks are initially defined broadly in an insuring agreement on a general policyform, then narrowed down by subsequent exclusion clauses. If the insured desirescoverage for a risk taken out by an exclusion on the standard form, the insured can

pay an additional premium for an endorsement to the policy that overrides theexclusion.

General features

The insurance contract or agreement is a contract whereby the insurer will pay theinsured (the person whom benefits would be paid to, or on the behalf of), if certaindefined events occur. Subject to the "fortuity principle", the event must beuncertain. The uncertainty can be either as to when the event will happen (i.e. in alife insurance policy, the time of the insured's death is uncertain) or as to if it willhappen at all (i.e. in a fire insurance policy, whether or not a fire will occur at all).

Insurance contracts are generally considered contracts of adhesion becausethe insurer draws up the contract and the insured has little or no ability tomake material changes to it. This is interpreted to mean that the insurer bearsthe burden if there is any ambiguity in any terms of the contract. Insurance

policies are sold without the policyholder even seeing a copy of the contract.

Insurance contracts are aleatory in that the amounts exchanged by theinsured and insurer are unequal and depend upon uncertain future events. Incontrast, ordinary non-insurance contracts are commutative in that theamounts (or values) exchanged are usually intended by the parties to be

roughly equal. This distinction is particularly important in the context ofexotic products like finite risk insurance which contain "commutation"provisions.

Insurance contracts are unilateral, meaning that only the insurer makeslegally enforceable promises in the contract. The insured is not required to

pay the premiums, but the insurer is required to pay the benefits under the

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contract if the insured has paid the premiums and met certain other basicprovisions.

Insurance contracts are governed by the principle of utmost good faith

(uberrima fides) which requires both parties of the insurance contact to dealin good faith and in particular it imparts on the insured a duty to disclose allmaterial facts which relate to the risk to be covered. This contrasts with thelegal doctrine that covers most other types of contracts, caveat emptor (letthe buyer beware). In the United States and United Kingdom, the insuredcan

introduction to insuranc1

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