24179372-insurance-project-on-icici-pru

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ContentsAbout ICICIPruMeaning of InsuranceHistory of insurancePrinciples of insurance Indemnification Insurers' business model History of insurance Types of insurance

o Auto insurance o Home insurance o Health insuranceo Disability insuranceo Casualty insuranceo Life insurance

o Property insuranceo Liability insuranceo Credit insuranceo Other types o Insurance financing vehicles o Closed community self-insurance

• Insurance companies • Global insurance industry • Controversies

o Insurance insulates too much o Complexity of insurance policy contracts o Redlining o Insurance patents o The insurance industry and rent seeking o Criticism of insurance companies



About ICICI PRU Life

Overview

The ICICI Prudential EdgeThe ICICI Prudential edge comes from our commitment to our customers, in all that we do - be it product development, distribution, thesales process or servicing. Here's a peek into what makes us leaders. 1. Our products have been developed after a clear and thoroughunderstanding of customers' needs. It is this research that helps usdevelop Education plans that offer the ideal way to truly guarantee your child's education, Retirement solutions that are a hedge against inflationand yet promise a fixed income after you retire, or Health insurance thatarms you with the funds you might need to recover from a dreaded



disease. 2. Having the right products is the first step, but it's equally important toensure that our customers can access them easily and quickly. To thisend, ICICI Prudential has an advisor base across the length and breadthof the country, and also partners with leading banks, corporate agentsand brokers to distribute our products .

3. Robust risk management and underwriting practices form the core of our business. With clear guidelines in place, we ensure equitable costingof risks, and thereby ensure a smooth and hassle-free claims process. 4. Entrusted with helping our customers meet their long-term goals, weadopt an investment philosophy that aims to achieve risk adjustedreturns over the long-term. 5. Last but definitely not the least, our 28,000 plus strong team is giventhe opportunity to learn and grow, every day in a multitude of ways. We

believe this keeps them engaged and enthusiastic, so that they candeliver on our promise to cover you, at every step in life.

Vision & Values

Our vision :

To be the dominant Life, Health and Pensions player built on trust byworld-class people and service. This we hope to achieve by:

• Understanding the needs of customers and offering them superior products and service



• Leveraging technology to service customers quickly, efficiently andconveniently

• Developing and implementing superior risk management andinvestment strategies to offer sustainable and stable returns to our

policyholders• Providing an enabling environment to foster growth and learning for

our employees

• And above all, building transparency in all our dealings

The success of the company will be founded in its unflinchingcommitment to 5 core values -- Integrity, Customer First, Boundaryless,Ownership and Passion. Each of the values describe what the companystands for, the qualities of our people and the way we work. We do believe that we are on the threshold of an exciting new opportunity,where we can play a significant role in redefining and reshaping the sector.Given the quality of our parentage and the commitment of our team, thereare no limits to our growth.

Our values :Every member of the ICICI Prudential team is committed to 5 core values:Integrity, Customer First, Boundaryless, Ownership, and Passion. Thesevalues shine forth in all we do, and have become the keystones of our success.



PromotersICICI Bank

ICICI Bank Limited (NYSE:IBN) is India's largest private sector bank and the second largest bank in the country, with consolidated total assetsof $121 billion as of March 31, 2008. ICICI Bank’s subsidiaries include

India’s leading private sector insurance companies and among its largestsecurities brokerage firms, mutual funds and private equity firms. ICICIBank’s presence currently spans 19 countries, including India.

Prudential Plc

Established in London in 1848, Prudential plc, through its businesses inthe UK, Europe, US, Asia and the Middle East, provides retail financialservices products and services to more than 20 million customers,

policyholder and unit holders and manages over £267 billion of fundsworldwide (as of December 31, 2007). In Asia, Prudential is the leadingEuropean life insurance company with life operations in China, HongKong, India, Indonesia, Japan, Korea, Malaysia, the Philippines,Singapore, Taiwan, Thailand, and Vietnam. Prudential is one of the largestretail fund managers for Asian sourced assets ex-Japan. Its fundmanagement business has expanded into ten markets, comprising of China,Hong Kong, India, Japan, Korea, Malaysia, Singapore, Taiwan, Vietnamand United Arab Emirates.



Fact SheetThe Company ICICI Prudential Life Insurance Company is a joint venture between ICICIBank, a premier financial powerhouse, and Prudential plc, a leadinginternational financial services group headquartered in the United

Kingdom. ICICI Prudential was amongst the first private sector insurancecompanies to begin operations in December 2000 after receiving approvalfrom Insurance Regulatory Development Authority (IRDA). ICICI Prudential Life's capital stands at Rs. 42.72 billion (as of June 30,2008) with ICICI Bank and Prudential plc holding 74% and 26% stakerespectively. For the quarter ended June 30, 2008, the company garneredRetail Weighted New Business Premium of Rs. 1,174 crores as against Rs810 crores for the quarter ended June 30, 2007, thereby posting a growthof 45% and has underwritten over 6 lakh policies over this period. Thecompany has assets held over Rs. 30,600 crore as on August 31, 2008. ICICI Prudential Life is also the only private life insurer in India to receivea National Insurer Financial Strength rating of AAA (Ind) from Fitchratings. The AAA (Ind) rating is the highest rating, and is a clear assuranceof ICICI Prudential's ability to meet its obligations to customers at the timeof maturity or claims.

For the past seven years, ICICI Prudential Life has retained its leadership position in the life insurance industry with a wide range of flexible products that meet the needs of the Indian customer at every step in life.





Savings & Wealth Creation Solutions• Save'n'Protect is a traditional endowment savings plan that offers

life protection along with adequate returns.• CashBak is an anticipated endowment policy ideal for meeting

milestone expenses like a child's marriage, expenses for a child'shigher education or purchase of an asset. It is available for terms of 15 and 20 years.

• LifeTime Gold is a unit-linked plan that offers customers theflexibility and control to customize the policy to meet the changing

needs at different life stages. It offers 7 fund options - Preserver,Protector, Balancer, Flexi Balanced Multiplier, R.I.C.H and FlexiGrowth.

• LifeStage RP is unit linked plan that provides you with an option of lifecycle-based portfolio strategy that continuously re-distributesyour money across various asset classes based on your life stage.This will help you achieve the right Asset Allocation to meet your desired financial goals.

• LifeLink Super is a single premium unit linked insurance planwhich combines life insurance cover with the opportunity to stayinvested in the stock market.

• Premier Life Gold is a limited premium paying plan speciallystructured for long-term wealth creation.

• InvestShield Life New is a unit linked plan that provides premium



guarantee on the invested premiums and ensures that the customer receives only the benefits of fund appreciation without any of therisks of depreciation.

• InvestShield Cashbak is a unit linked plan that provides premiumguarantee on the invested premiums along with flexible liquidityoptions.

• LifeStage Assure a unit linked insurance plan that provide upto 450

% of first year premium guarantee on maturity, with the additionaladvantage of a lifecycle based portfolio strategy that allocates theinvestor’s money across various asset classes based on his life stageand risk appetite.

Protection Solutions• LifeGuard is a protection plan, which offers life cover at low cost. It

is available in 3 options - level term assurance, level term assurance

with return of premium & single premium.• HomeAssure is a mortgage reducing term assurance plan designedspecifically to help customers cover their home loans in a simple andcost-effective manner.

Education Solutions• SmartKid New ULRP provides guaranteed educational benefits to a

child along with life insurance cover for the parent who purchasesthe policy. The policy is designed to provide money at importantmilestones in the child's life. SmartKid plans are also available intraditional form.

Retirement Solutions• ForeverLife is a traditional retirement product that offers guaranteed

returns for the first 4 years and then declares bonuses annually.• LifeTime Super Pension is a regular premium unit linked pension



plan that helps one accumulate over the long term and offers 5annuity options (life annuity, life annuity with return of purchase

price, joint life last survivor annuity with return of purchase price,life annuity guaranteed for 5, 10 and 15 years & for life thereafter,

joint life, last survivor annuity without return of purchase price) atthe time of retirement.

• LifeStage Pension is a regular premium unit linked pension plan that

provides you with a unique lifecycle-based strategy that continuouslyre-distributes your money across various asset classes based on your life stage, eventually providing you with a customized retirementsolution.

• LifeLink Super Pension is a single premium unit linked pension plan.

• Immediate Annuity is a single premium annuity product thatguarantees income for life at the time of retirement. It offers the

benefit of 5 payout options.• PremierLife Pension is a unique and convenient retirement solution

with a limited premium paying term of three or five years, to suit professionals and businessmen, especially those who require moreflexibility and customization while planning their finances.

Health Solutions• Health Assure Plus: Health Assure is a regular premium plan which

provides long term cover against 6 critical illnesses by providing policyholder with financial assistance, irrespective of the actualmedical expenses. Health Assure Plus offers the added advantage of an equivalent life insurance cover.

• Cancer Care: is a regular premium plan that pays cash benefit onthe diagnosis as well as at different stages in the treatment of variouscancer conditions.



• Cancer Care Plus: is a wellness plan that includes all the benefits of Cancer Care and also provides an additional benefit of free periodicalcancer screenings.

• Diabetes Care: Diabetes Care is a unique critical illness productspecially developed for individuals with Type 2 diabetes and pre-diabetes. It makes payments on diagnosis on any of 6 diabetes relatedcritical illnesses, and also offers a coordinated care approach to

managing the condition. Diabetes Care Plus also offers life cover.• Diabetes Care Plus: is a unique insurance policy that provides an

additional benefit of life cover for Type 2 diabetics and pre-diabetics• Hospital Care: is a fixed benefit plan covering various stages of

treatment - hospitalisation, ICU, procedures & recuperatingallowance. It covers a range of medical conditions (900 surgeries)and has a long term guaranteed coverage upto 20 years.

• Crisis Cover : is a 360-degree product that will provide long-termcoverage against 35 critical illnesses, total and permanent disability,and death.

• MediAssure is a health insurance policy that provides assuredinsurability till age 75 years, assured coverage for accepted pre-existing illnesses after 2 years and an assured price for 3 years.

• Group Insurance SolutionsICICI Prudential Life also offers Group Insurance Solutions for

companies seeking to enhance benefits to their employees.

• Group Gratuity Plan: ICICI Prudential Life's group gratuity plan helpsemployers fund their statutory gratuity obligation in a scientific manner and also avail of tax benefits as applicable to approved gratuity funds.

• Group Superannuation Plan: ICICI Prudential Life offers a flexible



market linked scheme that provides substantial benefits to both employersand employees. Both defined contribution (DC) and defined benefit (DB)schemes are offered to optimise returns for members of the trust andrationalise cost. Members have the option of choosing from variousannuity options or opting for a partial commutation of the annuity at thetime of retirement.• Group Immediate Annuities: ICICI Prudential Life realises the

importance of prudent retirement planning. With this in mind, we havedeveloped a suite of annuity products that not only give you an income for life but also provide you options to match your needs. In addition to theannuities offered to existing superannuation customers, we offer immediate annuities to superannuation funds not managed by us.• Group Term Plan: ICICI Prudential Life's flexible group term solutionhelps provide an affordable cover to members of a group. The cover could

be uniform or based on designation/rank or a multiple of salary. The benefit under the policy is paid to the beneficiary nominated by themember on his/her death.

Flexible Rider Options ICICI Prudential Life offers flexible riders, which can be added to the

basic policy at a marginal cost, depending on the specific needs of thecustomer.

1. Accident & disability benefit: If death occurs as the result of anaccident during the term of the policy, the beneficiary receives anadditional amount equal to the rider sum assured under the policy. If an accident results in total and permanent disability, 10% of rider sum assured will be paid each year, from the end of the 1st year after the disability date for the remainder of the base policy term or 10years, whichever is lesser. If the death occurs while travelling in an



authorized mass transport vehicle, the beneficiary will be entitled totwice the sum assured as additional benefit.

2. Critical Illness Benefit: protects the insured against financial loss inthe event of 9 specified critical illnesses. Benefits are payable to theinsured for medical expenses prior to death.

3. Waiver of Premium: In case of total and permanent disability due to

an accident, the future premiums continue to be paid by the companytill the time of maturity. This rider is available with SmartKid,LifeTime Plus, LifeTime Super and LifeTime Super Pension.

4. Income benefit rider: In case of death of the life assured during theterm of the policy, 10% of the sum assured is paid annually to thenominee on each policy anniversary till the maturity of the rider.

About the Promoters

ICICI Bank ICICI Bank Limited (NYSE:IBN) is India's largest private sector bank andthe second largest bank in the country, with consolidated total assets of $11 2.6 billion as of June 30 , 2008. ICICI Bank’s subsidiaries includeIndia’s leading private sector insurance companies and among its largestsecurities brokerage firms, mutual funds and private equity firms. ICICI

Bank’s presence currently spans 19 countries, including India.Established in London in 1848, Prudential plc, through its businesses inthe UK, Europe, US, Asia and the Middle East, provides retail financialservices products and services to more than 21 million customers,

policyholder and unit holders and manages over £256 billion of fundsworldwide (as of June 30, 2008). In Asia, Prudential is the leading Europe-

based life insurer with life operations in China, Hong Kong, India,



Indonesia, Japan, Korea, Malaysia, the Philippines, Singapore, Taiwan,Thailand, and Vietnam. Prudential is one of the largest asset managementcompanies in terms of overall assets sourced in Asia ex-japan, with £34.3

billion funds under management (as of June 30, 2008) and operations inten markets including China, Hong Kong, India, Japan, Korea, Malaysia,Singapore, Taiwan, Vietnam and United Arab Emirates.

Meaning Of InsuranceMeaning Of Insurance :

facilitates reimbursement duringcrisis situations,insurance means promise of compensation for any potential future losses. There are different insurance companies thatoffer wide range of insurance options and an insurance purchaser canselect as per own convenience and preference.

Several insurances provide comprehensive coverage withaffordable premiums. Premiums are periodical payment and differentinsurers offer diverse premium options.

The periodical insurance premiums are calculated according tothe total insurance amount. The main meaning of insurance are used aseffective tools of risk management. Quantified risks of different volumescan be insured.

The aim of all insurance is to compensate the owner against lossarising from a variety of risks, which he anticipates, to his life, propertyand business. Insurance is mainly of two types: life insurance andgeneral insurance. General insurance means Fire, Marine andMiscellaneous insurance which includes insurance against burglary or

theft, fidelity guarantee, insurance for employer's liability, and insuranceof motor vehicles, livestock and crops.



The Insurance Act, 1972 and the General Insurance Business(Nationalisation) Act, 1972 govern Fire and Marine Insurance, while theIndian Marine Insurance At, 1963 governs marine insurance in our country. These laws contain provisions relating to the constitution,management and winding up of insurance companies and the conduct of insurance business of all types. All insurance business in India has beennationalised.

A Contract of insurance is a contract by which one party undertakesto make good the loss of another, in consideration of a sum of money, onthe happening of a specified event, e.g. fire accident or death.

HISTORY OF INSURANCEIn some sense we can say that insurance appears simultaneously with theappearance of human society. We know of two types of economies inhuman societies: money economies (with markets, money, financialinstruments and so on) and non-money or natural economies (withoutmoney, markets, financial instruments and so on). The second type is amore ancient form than the first. In such an economy and community,we can see insurance in the form of people helping each other. For example, if a house burns down, the members of the community help

build a new one. Should the same thing happen to one's neighbour, theother neighbours must help. Otherwise, neighbours will not receive helpin the future. This type of insurance has survived to the present day insome countries where modern money economy with its financial

instruments is not widespread (for example countries in the territory of the former Soviet Union).Turning to insurance in the modern sense (i.e., insurance in a modernmoney economy, in which insurance is part of the financial sphere),early methods of transferring or distributing risk were practised byChinese and Babylonian traders as long ago as the 3rd and 2ndmillennia BC, respectively. Chinese merchants travelling treacherousriver rapids would redistribute their wares across many vessels to limitthe loss due to any single vessel's capsizing. The Babylonians developeda system which was recorded in the famous Code of Hammurabi , c.



1750 BC, and practised by early Mediterranean sailing merchants .If a merchant received a loan to fund his shipment, he would pay thelender an additional sum in exchange for the lender's guarantee to cancelthe loan should the shipment be stolen.Achaemenian monarchs of Iran were the first to insure their peopleand made it official by registering the insuring process in governmentalnotary offices. The insurance tradition was performed each year in

Norouz (beginning of the Iranian New Year); the heads of differentethnic groups as well as others willing to take part, presented gifts to themonarch. The most important gift was presented during a specialceremony. When a gift was worth more than 10,000 Derrik (Achaemenian gold coin) the issue was registered in a special 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 was that whenever the person who presentedthe gift registered by the court was in trouble, the monarch and the courtwould help him. Jahez, a historian and writer, writes in one of his bookson ancient Iran: "[W]henever the owner of the present is in trouble or wants to construct a building, set up a feast, have his children married,etc. the one in charge of this in the court would check the registration. If the registered amount exceeded 10,000 Derrik, he or she would receivean amount of twice as much."

A thousand years later, the inhabitants of Rhodes invented the

concept of the ' general average '. Merchants whose goods were being shipped together would pay a proportionally divided premiumwhich would be used to reimburse any merchant whose goods were

jettisoned during storm or sinkage.The Greeks and Romans introduced the origins of health and lifeinsurance c. 600 AD when they organized guilds called "benevolentsocieties" which cared for the families and paid funeral expenses of members upon death . Guilds in the Middle Ages served a similar

purpose. The Talmud deals with several aspects of insuring goods .Before insurance was established in the late 17th century, "friendlysocieties" existed in England, in which people donated amounts of



money to a general sum that could be used for emergencies.Separate insurance contracts (i.e., insurance policies not bundled withloans or other kinds of contracts) were invented in Genoa in the 14thcentury, as were insurance pools backed by pledges of landed estates.These new insurance contracts allowed insurance to be separated frominvestment, a separation of roles that first proved useful in marineinsurance. Insurance became far more sophisticated in post-

Renaissance Europe , and specialized varieties developed.Toward the end of the seventeenth century, London's growingimportance as a centre for trade increased demand for marine insurance.In the late 1680s, Edward Lloyd opened a coffee house that became a

popular haunt of ship owners, merchants, and ships’ captains, andthereby a reliable source of the latest shipping news. It became themeeting place for parties wishing to insure cargoes and ships, and thosewilling to underwrite such ventures. Today, Lloyd's of Londonremains the leading market (note that it is not an insurance company) for marine and other specialist types of insurance, but it works rather differently than the more familiar kinds of insurance.Insurance as we know it today can be traced to the Great Fire of London , which in 1666 devoured 13,200 houses. In the aftermath of this disaster, Nicholas Barbon opened an office to insure buildings.In 1680, he established England's first fire insurance company, "The FireOffice," to insure brick and frame homes.The first insurance company in the United States underwrote fire

insurance and was formed in Charles Town (modern-day Charleston ),South Carolina , in 1732. Benjamin Franklin helped to popularizeand make standard the practice of insurance, particularly against fire inthe form of perpetual insurance . In 1752, he founded thePhiladelphia Contributionship for the Insurance of Housesfrom Loss by Fire . Franklin's company was the first to makecontributions toward fire prevention. Not only did his company warnagainst certain fire hazards, it refused to insure certain buildings wherethe risk of fire was too great, such as all wooden houses. In the UnitedStates, regulation of the insurance industry is highly Balkanized ,



with primary responsibility assumed by individual state insurancedepartments. Whereas insurance markets have become centralizednationally and internationally, state insurance commissioners operateindividually, though at times in concert through a nationalinsurance commissioners' organization . In recent years, somehave called for a dual state and federal regulatory system (commonlyreferred to as the Optional Federal Charter (OFC)) for insurance

similar to that which oversees state banks and national banks.

FUNDAMENTAL PRINCIPLES OFINSURANCE

INDEMNITYA contract of insurance contained in a fire, marine, burglary or any other

policy (excepting life assurance and personal accident and sicknessinsurance) is a contract of indemnity. This means that the insured, in caseof loss against which the policy has been issued, shall be paid the actualamount of loss not exceeding the amount of the policy, i.e. he shall befully indemnified. The object of every contract of insurance is to placethe insured in the same financial position, as nearly as possible, after theloss, as if he loss had not taken place at all. It would be against public

policy to allow an insured to make a profit out of his loss or damage.

UTMOST GOOD FAITHSince insurance shifts risk from one party to another, it is essential thatthere must be utmost good faith and mutual confidence between theinsured and the insurer. In a contract of insurance the insured knowsmore about the subject matter of the contract than the insurer.Consequently, he is duty bound to disclose accurately all material facts





Risk - In a contract of insurance the insurer undertakes to protect theinsured from a specified loss and the insurer receive a premium for running the risk of such loss. Thus, risk must attach to a policy.

Mitigation of Loss · - In the event of some mishap to the insured property, the insured must take all necessary steps to mitigate or minimize the loss, just as any prudent person would do in thosecircumstances. If he does not do so, the insurer can avoid the payment of loss attributable to his negligence. But it must be remembered thatthough the insured is bound to do his best for his insurer, he is, not boundto do so at the risk of his life.

Subrogation · - The doctrine of subrogation is a corollary to the principle of indemnity and applies only to fire and marine insurance.According to it, when an insured has received full indemnity in respectof his loss, all rights and remedies which he has against third person will

pass on to the insurer and will be exercised for his benefit until he (the

insurer) recoups the amount he has paid under the policy. It must beclarified here that the insurer's right of subrogation arises only when hehas paid for the loss for which he is liable under the policy and this rightextend only to the rights and remedies available to the insured in respectof the thing to which the contract of insurance relates.Offer & Acceptance - In order to create a valid insurance contract,

•



there should be a lawful acceptance of the same by the insurer. Termlawful means offer and its acceptance must cofirm to the rules laid downin the Indian cotract act regarding valid offer and acceptance.Lawful Object - Insurance contract will be invalid if hte object of

•insurance is illegal or against public policy. So the object of theinsurance contract should be legal. It means insurance policy can not be

taken against unlawful object.Contract - Insurance is a form of contract under which one party

•agrees in return of a consideration to pay an agreed amount of money toanother party to make good for a loss, damages, injury to some thing of value in which the insured has a pecuniary intrest as a result of someuncretain event.Commercially insurable risks typically share seven commoncharacteristics.1. A large number of homogeneous exposure units . The vastmajority of insurance policies are provided for individual members of very large classes. Automobile insurance, for example, covered about175 million automobiles in the United States in 2004. The existence of alarge number of homogeneous exposure units allows insurers to benefitfrom the so-called “ law of large numbers ,” which in effect statesthat as the number of exposure units increases, the actual results areincreasingly likely to become close to expected results. There are

exceptions to this criterion. Lloyd's of London is famous for insuringthe life or health of actors, actresses and sports figures. Satellite Launchinsurance covers events that are infrequent. Large commercial property

policies may insure exceptional properties for which there are no‘homogeneous’ exposure units. Despite failing on this criterion, manyexposures like these are generally considered to be insurable.2. Definite Loss . The event that gives rise to the loss that is subject toinsurance should, at least in principle, take place at a known time, in aknown 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 nospecific time, place or cause is identifiable. Ideally, the time, place andcause of a loss should be clear enough that a reasonable person, withsufficient information, could objectively verify all three elements .

3. 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 froman event for which there is only the opportunity for cost. Events thatcontain speculative elements, such as ordinary business risks, aregenerally not considered insurable.4. Large Loss . The size of the loss must be meaningful from the

perspective of the insured. Insurance premiums need to cover both theexpected cost of losses, plus the cost of issuing and administering the

policy, adjusting losses, and supplying the capital needed to reasonablyassure that the insurer will be able to pay claims. For small losses theselatter costs may be several times the size of the expected cost of losses.There is little point in paying such costs unless the protection offered hasreal value to a buyer.5. Affordable Premium . If the likelihood of an insured event is sohigh, or the cost of the event so large, that the resulting premium is largerelative to the amount of protection offered, it is not likely that anyonewill buy insurance, even if on offer. Further, as the accounting

profession formally recognizes in financial accounting standards, the premium cannot be so large that there is not a reasonable chance of asignificant loss to the insurer. If there is no such chance of loss, thetransaction may have the form of insurance, but not the substance.6. Calculable Loss . There are two elements that must be at leastestimable, if not formally calculable: the probability of loss, and theattendant 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 lossassociated with a claim presented under that policy to make a reasonably



definite and objective evaluation of the amount of the loss recoverable asa result of the claim.

7. Limited risk of catastrophically large losses . The essential risk is

often aggregation. If the same event can cause losses to numerous policyholders of the same insurer, the ability of that insurer to issue policies becomes constrained, not by factors surrounding the individualcharacteristics of a given policyholder, but by the factors surroundingthe sum of all policyholders so exposed. Typically, insurers prefer tolimit their exposure to a loss from a single event to some small portionof their capital base, on the order of 5 percent . Where the loss can beaggregated, or an individual policy could produce exceptionally largeclaims, the capital constraint will restrict an insurer's appetite for additional policyholders. The classic example is earthquake insurance,where the ability of an underwriter to issue a new policy depends on thenumber and size of the policies that it has already underwritten. Windinsurance in hurricane zones, particularly along coast lines, is another example of this phenomenon. In extreme cases, the aggregation canaffect the entire industry, since the combined capital of insurers andreinsurers can be small compared to the needs of potential policyholdersin areas exposed to aggregation risk . In commercial fire insurance it

is possible to find single properties whose total exposed value is well inexcess of any individual insurer’s capital constraint.



INDEMNIFICATIONThe technical definition of "indemnity" means to make whole again.There are two types of insurance contracts; 1) an "indemnity" policy and2) a "pay on behalf" or "on behalf of" policy. The difference issignificant on paper, but rarely material in practice.An "indemnity" policy will never pay claims until the insured has paid

out of pocket to some third party; for example, a visitor to your homeslips on a floor that you left wet and sues you for $10,000 and wins.Under an "indemnity" policy the homeowner would have to come upwith the $10,000 to pay for the visitor's fall and then would be"indemnified" by the insurance carrier for the out of pocket costs (the$10,000).Under the same situation, a "pay on behalf" policy, the insurance carrier would pay the claim and the insured (the homeowner) would not be outof pocket for anything. Most modern liability insurance is written on the

basis of "pay on behalf" language.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, ata minimum, the following elements: the 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 paidto 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 events covered in the policy.When insured parties experience a loss for a specified peril, the coverageentitles the policyholder to make a 'claim' against the insurer for thecovered amount of loss as specified by the policy. The fee paid by theinsured to the insurer for assuming the risk is called the 'premium'.

INSURER'S BUSINESS MODELProfit = earned premium + investment income - incurred loss -underwriting expenses.Insurers make money in two ways: (1) through underwriting , the

process by which insurers select the risks to insure and decide how muchin premiums to charge for accepting those risks and (2) by investing the

premiums they collect from insured parties.The most complicated aspect of the insurance business is theunderwriting of policies. Using a wide assortment of data, insurers

predict the likelihood that a claim will be made against their policies and price products accordingly. To this end, insurers use actuarialscience to quantify the risks they are willing to assume and the

premium they will charge to assume them. Data is analyzed to fairlyaccurately project the rate of future claims based on a given risk.Actuarial science uses statistics and probability to analyze the risksassociated with the range of perils covered, and these scientific

principles are used to determine an insurer's overall exposure. Upontermination of a given policy, the amount of premium collected and the

investment gains thereon minus the amount paid out in claims is theinsurer's underwriting profit on that policy. Of course, from the



insurer's perspective, some policies are winners (i.e., the insurer pays outless in claims and expenses than it receives in premiums and investmentincome) and some are losers (i.e., the insurer pays out more in claimsand expenses than it receives in premiums and investment income).An insurer's underwriting performance is measured in its combinedratio. The loss ratio (incurred losses and loss-adjustment expensesdivided by net earned premium) is added to the expense ratio

(underwriting expenses divided by net premium written) to determinethe company's combined ratio. The combined ratio is a reflection of thecompany's overall underwriting profitability. A combined ratio of lessthan 100 percent indicates underwriting profitability, while anythingover 100 indicates an underwriting loss.Insurance companies also earn investment profits on “float”. “Float”or available reserve is the amount of money, at hand at any givenmoment, that an insurer has collected in insurance premiums but has not

been paid out in claims. Insurers start investing insurance premiums assoon as they are collected and continue to earn interest on them untilclaims are paid out.In the United States , the underwriting loss of property andcasualty insurance companies was $142.3 billion in the five yearsending 2003. But overall profit for the same period was $68.4 billion, asthe result of float. Some insurance industry insiders, most notably Hank Greenberg , do not believe that it is forever possible to sustain a profitfrom float without an underwriting profit as well, but this opinion is not

universally held. Naturally, the “float” method is difficult to carry out inan economically depressed period. Bear markets do cause insurers toshift away from investments and to toughen up their underwritingstandards. 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 .

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Property and casualty insurers currently make the most money fromtheir auto insurance line of business. Generally better statistics areavailable on auto losses and underwriting on this line of business has

benefited greatly from advances in computing. Additionally, property



losses in the United States , due to natural catastrophes, haveexacerbated this trend.Finally, claims and loss handling is the materialized utility of insurance.In managing the claims-handling function, insurers seek to balance theelements of customer satisfaction, administrative handling expenses, andclaims overpayment leakages. As part of this balancing act, fraudulentinsurance practices are a major business risk that must be managed

and overcome.

TYPES OF INSURANCEAny 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 andwhich are not. Below are (non-exhaustive) lists of the many differenttypes of insurance that exist. A single policy may cover risks in one or more of the categories set out below. For example, auto insurance wouldtypically cover both property risk (covering the risk of theft or damageto the car) and liability risk (covering legal claims from causing anaccident). A homeowner 's insurance policy in the U.S. typicallyincludes property insurance covering damage to the home and theowner's belongings, liability insurance covering certain legal claimsagainst the owner, and even a small amount of coverage for medicalexpenses of guests who are injured on the owner's property.Business insurance can be any kind of insurance that protects

businesses against risks. Some principal subtypes of business insuranceare (a) the various kinds of professional liability insurance , also called

professional indemnity insurance , which are discussed below under thatname; and (b) the business owner's policy (BOP), which bundles into



one policy many of the kinds of coverage that a business owner needs, ina way analogous to how homeowners insurance bundles the coveragesthat a homeowner needs.

AUTO INSURANCE Auto insurance protects you against financial loss if you have anaccident. It is a contract between you and the insurance company. Youagree to pay the premium and the insurance company agrees to pay your losses as defined in your policy. Auto insurance provides property,liability and medical coverage: (1) Property coverage pays for damage toor theft of your car. (2) Liability coverage pays for your legalresponsibility to others for bodily injury or property damage. and (3)Medical coverage pays for the cost of treating injuries, rehabilitation andsometimes lost wages and funeral expenses. . Most states require you to

buy some, but not all, of these coverages. If you're financing a car, your lender may also have requirements.

HOME INSURANCEWhat is homeowners insurance?Homeowners insurance provides financial protection against disasters. Astandard policy insures the home itself and the things you keep in it.Homeowners insurance is a package policy. This means that it covers

both damage to your property and your liability or legal responsibilityfor any injuries and property damage you or members of your familycause to other people. This includes damage caused by household pets.Damage caused by most disasters is covered but there are exceptions.The most significant are damage caused by floods, earthquakes and poor maintenance. You must buy two separate policies for flood andearthquake coverage. Maintenance-related problems are thehomeowners' responsibility.

HEALTH INSURANCEAlmost all developed countries have government-supplied insurance for health



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

package, along with health insurance. Most countries rely on publicfunding to ensure that all citizens have universal access to health

care .

DISABILITY INSURANCE• Disability insurance policies provide financial support in theevent the policyholder is unable to work because of disabling illness or injury. It provides monthly support to help pay such obligations asmortgages and credit cards.• Total permanent disability insurance provides benefitswhen 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 aworker's wages lost and accompanying medical expenses incurred because of a job-related injury.

CASUALTYCasualty insurance insures against accidents, not necessarily tied to anyspecific property.• Crime insurance is a form of casualty insurance that covers the



policyholder against losses arising from the criminal acts of third parties.For example, a company can obtain crime insurance to cover lossesarising from theft or embezzlement.• Political risk insurance is a form of casualty insurance thatcan be taken out by businesses with operations in countries in whichthere is a risk that revolution or other political conditions will resultin a loss.

LIFE INSURANCELife insurance provides a monetary benefit to a descedent's family or other designated beneficiary, and may specifically provide for income toan insured person's family, burial , funeral and other final expenses.Life insurance policies often allow the option of having the proceeds

paid to the beneficiary either in a lump sum cash payment or an annuity.Annuities provide a stream of payments and are generally classified asinsurance because they are issued by insurance companies and regulated

as insurance and require the same kinds of actuarial and investmentmanagement expertise that life insurance requires. Annuities and pensions that pay a benefit for life are sometimes regarded asinsurance against the possibility that a retiree will outlive his or her financial resources. In that sense, they are the complement of lifeinsurance and, from an underwriting perspective, are the mirror image of life insurance.Certain life insurance contracts accumulate cash values, which may betaken by the insured if the policy is surrendered or which may be

borrowed against. Some policies, such as annuities and endowment policies , are financial instruments to accumulate or liquidatewealth when it is needed.In many countries, such as the U.S. and the UK, the tax law providesthat the interest on this cash value is not taxable under certaincircumstances. This leads to widespread use of life insurance as a tax-efficient method of saving as well as protection in the event of earlydeath.



Life insurance life assurance or is a contract between the policyowner and the insurer , where the insurer agrees to pay a sum of moneyupon the occurrence of the insured individual's or individuals' death or other event, such as terminal illness or critical illness. In return, the

policy owner agrees to pay a stipulated amount called a premium atregular intervals or in lump sums. There may be designs in somecountries where bills and death expenses plus catering for after funeralexpenses should be included in Policy Premium. In the United States,the predominant form simply specifies a lump sum to be paid on theinsured's demise.As with most insurance policies, life insurance is a contract between theinsurer and the policy owner whereby a benefit is paid to the designated

beneficiaries if an insured event occurs which is covered by the policy.To be a life policy the insured event must be based upon the lives of the

people named in the policy.

DEATH PROCEEDSUpon the insured's death, the insurer requires acceptable proof of death

before it pays the claim. The normal minimum proof required is a deathcertificate and the insurer's claim form completed, signed (and typically

notarized ). If the insured's death is suspicious and the policy amount islarge, the insurer may investigate the circumstances surrounding thedeath before deciding whether it has an obligation to pay the claim.Proceeds from the policy may be paid as a lump sum or as an annuity ,which is paid over time in regular recurring payments for either aspecified period or for a beneficiary's lifetime .INSURANCE vs. ASSURANCEOutside the the specific uses of the terms "insurance" and "assurance"are sometimes confused. In general, in these jurisdictions "insurance"



refers to providing cover for an event that might happen (fire, theft,flood, etc.), while "assurance" is the provision of cover for an event thatis certain to happen. However, in the United States both forms of coverage are called "insurance", principally due to many companiesoffering both types of policy, and rather than refer to themselves using

both insurance and assurance titles, they instead use just one.

TYPES OF LIFE INSURANCELife insurance may be divided into two basic classes – temporary and

permanent or following subclasses - term, universal, whole life, variable,variable universal and endowment life insurance.TEMPORARY (Term)

Term life insurance or 'term assurance' provides for life insurancecoverage for a specified term of years for a specified premium . The policy does not accumulate cash value. Term is generally considered"pure" insurance, where the premium buys protection in the event of death and nothing else.

The three key factors to be considered in term insurance are: faceamount (protection or death benefit), premium to be paid (cost to the



insured), and length of coverage (term).Various insurance companies sell term insurance with many different

combinations of these three parameters. The face amount can remainconstant or decline. The term can be for one or more years. The

premium can remain level or increase. A common type of term is calledannual renewable term. It is a one year policy but the insurance companyguarantees it will issue a policy of equal or lesser amount without regard

to the insurability of the insured and with a premium set for the insured'sage at that time. Another common type of term insurance is mortgageinsurance , which is usually a level premium, declining face value policy.The face amount is intended to equal the amount of the mortgage on the

policy owner’s residence so the mortgage will be paid if the insured dies.A policy holder insures his life for a specified term. If he dies before thatspecified term is up, his estate or named beneficiary(ies) receive(s) a

payout. If he does not die before the term is up, he receives nothing. Inthe past these policies would almost always exclude suicide. However,after a number of court judgments against the industry, payouts do occur on death by suicide (presumably except for in the unlikely case that itcan be shown that the suicide was just to benefit from the policy).Generally, if an insured person commits suicide within the first two

policy years, the insurer will return the premiums paid.PERMANENTPermanent life insurance is life insurance that remains in force (in-line)until the policy matures (pays out), unless the owner fails to pay the

premium when due (the policy expires OR policies lapse). The policycannot be canceled by the insurer for any reason except fraud in theapplication, and that cancellation must occur within a period of timedefined by law (usually two years). Permanent insurance builds a cashvalue that reduces the amount at risk to the insurance company and thusthe insurance expense over time. This means that a policy with a milliondollars face value can be relatively expensive to a 70 year old. Theowner can access the money in the cash value by withdrawing money,

borrowing the cash value, or surrendering the policy and receiving thesurrender value.



The three basic types of permanent insurance are whole life , universallife , and endowment .Whole life coverageWhole life insurance provides for a level premium, and a cash valuetable included in the policy guaranteed by the company. The primaryadvantages of whole life are guaranteed death benefits, guaranteed cashvalues, fixed and known annual premiums, and mortality and expensecharges will not reduce the cash value shown in the policy. The primarydisadvantages of whole life are premium inflexibility, and the internalrate of return in the policy may not be competitive with other savingsalternatives. Riders are available that can allow one to increase the death

benefit by paying additional premium. The death benefit can also beincreased through the use of policy dividends. Dividends cannot beguaranteed and may be higher or lower than historical rates over time.Premiums are much higher than term insurance in the short-term, but

cumulative premiums are roughly equal if policies are kept in force untilaverage life expectancy.Cash value can be accessed at any time through policy "loans". Sincethese loans decrease the death benefit if not paid back, payback isoptional.Universal life coverageUniversal life insurance (UL) is a relatively new insurance productintended to provide permanent insurance coverage with greater flexibility in premium payment and the potential for a higher internalrate of return. There are several types of universal life insurance policieswhich include "interest sensitive" (also known as "traditional fixeduniversal life insurance"), variable universal life insurance, and equityindexed universal life insurance.A universal life insurance policy includes a cash account. Premiumsincrease the cash account. Interest is paid within the policy (credited) onthe account at a rate specified by the company. This rate may have aguaranteed minimum (for fixed ULs) or no minimum (for variable ULs).

Mortality charges and administrative costs are then charged against



(reduce) the cash account. The surrender value of the policy is theamount remaining in the cash account less applicable surrender charges,if any.With all life insurance, there are basically two functions that make itwork. There's a mortality function and a cash function. The mortalityfunction would be the classical notion of pooling risk where the

premiums paid by everybody else would cover the death benefit for the

one or two who will die for a given period of time. The cash functioninherent in all life insurance says that if a person is to reach age 95 to100 (the age varies depending on state and company), then the policymatures and endows the face value of the policy.Actuarially, it is reasoned that out of a group of 1000 people, if even 10of them live to age 95, then the mortality function alone will not be ableto cover the cash function. So in order to cover the cash function, aminimum rate of investment return on the premiums will be required inthe event that a policy matures.Universal life insurance addresses the perceived disadvantages of wholelife. Premiums are flexible. Depending on how interest is credited, theinternal rate of return can be higher because it moves with prevailinginterest rates (interest-sensitive) or the financial markets (Equity IndexedUniversal Life and Variable Universal Life). Mortality costs andadministrative charges are known. And cash value may be consideredmore easily attainable because the owner can discontinue premiums if the cash value allows it. And universal life has a more flexible death

benefit because the owner can select one of two death benefit options,Option A and Option B.Option A pays the face amount at death as it's designed to have the cashvalue equal the death benefit at maturity (usually at age 95 or 100). Witheach premium payment, the policy owner is reducing the cost of insurance until the cash value reaches the face amount upon maturity.Option B pays the face amount plus the cash value, as it's designed toincrease the net death benefit as cash values accumulate. Option B offersthe benefit of an increasing death benefit every year that the policy staysin force. The drawback to option B is that because the cash value isaccumulated "on top of" the death benefit, the cost of insurance never



decreases as premium payments are made. Thus, as the insured getsolder, the policy owner is faced with an ever increasing cost of insurance(it costs more money to provide the same initial face amount of insurance as the insured gets older).Both death benefit options - A (level) and B (increasing) - are subject tothe same IRS rules and guidelines concerning premium payments andtax-favored treatment of cash values. In order for the policy to keep its

tax favored life insurance status, it must stay within a corridor specified by state and federal laws that prevent abuses such as attaching a milliondollars in cash value to a two dollar insurance policy. The interesting

part about this corridor is that for those people who can make it to age95-100, this corridor requirement goes away and your cash value canequal exactly the face amount of insurance. If this corridor is ever violated, then the universal life policy will be treated as, and in effectturn into, a Modified Endowment Contract (or more commonly referredto as a MEC).But universal life has its own disadvantages which stem primarily fromthis flexibility. The policy lacks the fundamental guarantee that the

policy will be in force unless sufficient premiums have been paid andcash values are not guaranteed.Early universal life policies are sometimes erroneously referred to asself-sustaining policies. In the 1980s, when interest rates were high, thecash value accumulated at a more accelerated rate, and universal lifecoverage was often sold by agents as a policy that could be self-paying.

Many policies did sustain themselves for a prolonged period, but thecombination of lower interest rates and an increasing cost of insuranceas the insured ages meant that for many policies, the cash option wasdiminished or depleted.Interest-Sensitive Universal Life Insurance An interest sensitiveUL policy was the first attempt at creating a flexible premium lifeinsurance policy and was created in the 1980s. Interest-sensitive UL

policies guarantee, to some extent, the death proceeds, but not the cash

function - thus the flexible premiums and interest returns. If interestrates are high, then the investment returns help reduce the required premiums needed to keep the policy in force. If interest rates are low,



then the customer would have to pay additional premiums in order tokeep the policy in force. When interest rates are above the minimumrequired or minimum guaranteed interest rate, then the customer has theflexibility to pay less as investment returns cover the remainder to keepthe policy in force.Equity-Indexed Universal Life InsuranceEquity-Indexed Universal Life Insurance or "EIUL" for short, is a fixeduniversal life insurance policy that was created in the mid 1990s toaddress concerns about market volatility and provide an alternative tothe low interest rates being offered by interest-sensitive UL policies.EIULs differ from interest-sensitive UL policies in that they creditinterest to the policy's cash values based on the upward movement of a

particular stock market index - usually the S&P500. The insurancecompany can then credit the gains in the stock market according to oneof several different crediting methods. The most popular is the "point-to-

point" method. When the policy is issued, the insurance company "pegs"the stock market's value. At the anniversary of the policy, the insurancecompany checks the value of the underlying stock index and credits thecash value with the difference up to a cap (specified by the company).For example, if a policy owner purchased an EIUL on January, and theinsurance company used the S&P500 as the underlying index whencrediting interest to policy cash values, and the company set a 12 % cap,the process would work like this:If the S&P500 was 1,100 in January, the insurance company wouldrecord the value of the index. On the anniversary of the policy (the nextJanuary), the insurance company would record the new value of theS&P500. If the new value of the index was 1,188, that would represent again of 8%. The insurance company would credit the policy cash valueswith 8% for that year.If the S&P500 lost value (i.e. the value went from 1,100 to 980), theinsurance company would simply record a "0", and the policy wouldshow a year of no growth. The policy owner would not; however, lose

any money (principal or interest from a previous year) as a result of anegative return on the S&P500.If the S&P500 was 1,100 in January, the insurance company would





EndowmentsEndowments are policies in which the cash value built up inside the

policy, equals the death benefit (face amount) at a certain age. The agethis commences is known as the endowment age. Endowments areconsiderably more expensive (in terms of annual premiums) than either whole life or universal life because the premium paying period isshortened and the endowment date is earlier.In the United States, the Technical Corrections Act of 1988 tightened therules on tax shelters (creating modified endowments ). These follow taxrules as annuities and IRAs do.Endowment Insurance is paid out whether the insured lives or dies, after a specific period (e.g. 15 years) or a specific age (e.g. 65).

Accidental deathAccidental death is a limited life insurance that is designed to cover theinsured when they pass away due to an accident. Accidents includeanything from an injury, but do not typically cover any deaths resultingfrom health problems or suicide. Because they only cover accidents,these policies are much less expensive than other life insurances.

It is also very commonly offered as " accidental death anddismemberment insurance ", also known as an AD&D policy. In an

AD&D policy, benefits are available not only for accidental death, butalso for loss of limbs or bodily functions such as sight and hearing, etc.Accidental death and AD&D policies very rarely pay a benefit; either the cause of death is not covered, or the coverage is not maintained after the accident until death occurs. To be aware of what coverage they have,an insured should always review their policy for what it covers and whatit excludes. Often, it does not cover an insured who puts themselves at



risk in activities such as: parachuting, flying an airplane, professionalsports, or involvement in a war (military or not). Also, some insurerswill exclude death and injury caused by proximate causes due to (but notlimited to) racing on wheels and mountaineering.Accidental death benefits can also be added to a standard life insurance

policy as a rider. If this rider is purchased, the policy will generally paydouble the face amount if the insured dies due to an accident. This used

to be commonly referred to as a double indemnity coverage. In somecases, some companies may even offer a triple indemnity cover.Related life insurance productsRiders are modifications to the insurance policy added at the same timethe policy is issued. These riders change the basic policy to providesome feature desired by the policy owner. A common rider is accidentaldeath, which used to be commonly referred to as "double indemnity",which pays twice the amount of the policy face value if death results

from accidental causes, as if both a full coverage policy and anaccidental death policy were in effect on the insured.Joint life insurance is either a term or permanent policy insuring two or more lives with the proceeds payable on the first death.Survivorship life or second-to-die life is a whole life policy insuringtwo lives with the proceeds payable on the second (later) death.Single premium whole life is a policy with only one premium which is

payable at the time the policy is issued.Modified whole life is a whole life policy that charges smaller

premiums for a specified period of time after which the premiumsincrease for the remainder of the policy.Group life insurance is term insurance covering a group of people,usually employees of a company or members of a union or association.Individual proof of insurability is not normally a consideration in theunderwriting. Rather, the underwriter considers the size and turnover of the group, and the financial strength of the group. Contract provisions



will attempt to exclude the possibility of adverse selection. Group lifeinsurance often has a provision that a member exiting the group has theright to buy individual insurance coverage.

Investment policiesWith-profits policies

Some policies allow the policyholder to participate in the profits of theinsurance company these are with-profits policies . Other policies haveno rights to participate in the profits of the company, these are non-

profit policies.With-profits policies are used as a form of collective investment toachieve capital growth. Other policies offer a guaranteed return notdependent on the company's underlying investment performance; theseare often referred to as without-profit policies which may be construedas a misnomer.

Insurance/Investment BondsPensionsPensions are a form of life assurance. However, whilst basic lifeassurance, permanent health insurance and non-pensions annuity

business includes an amount of mortality or morbidity risk for theinsurer, for pensions there is a longevity risk .A pension fund will be built up throughout a person's working life.When the person retires, the pension will become in payment, and atsome stage the pensioner will buy an annuity contract, which willguarantee a certain pay-out each month until death.AnnuitiesAn annuity is a contract with an insurance company whereby the

purchaser pays an initial premium or premiums into a tax-deferred



account, which pays out a sum at pre-determined intervals. There aretwo periods: the accumulation (when payments are paid into theaccount) and the annuitization (when the insurance company pays out).For example, a policy holder may pay £10,000, and in return receive£150 each month until he dies; or £1,000 for each of 14 years or death

benefits if he dies before the full term of the annuity has elapsed. Tax penalties and insurance company surrender charges may apply to

premature withdrawals (if indeed these are allowed; in most marketsoutside the U.S. the policy owner has no right to end the contract

prematurely).

Tax and life insuranceTaxation of life insurance in the United StatesPremiums paid by the policy owner are normally not deductible for federal and state income tax purposes.Proceeds paid by the insurer upon death of the insured are not includedin gross income for federal and state income tax purposes; however, if

the proceeds are included in the "estate" of the deceased, it is likely theywill be subject to federal and state estate and inheritance tax .Cash value increases within the policy are not subject to income taxesunless certain events occur. For this reason, insurance policies can be alegal and legitimate tax shelter wherein savings can increase withouttaxation until the owner withdraws the money from the policy. Onflexible-premium policies, large deposits of premium could cause thecontract to be considered a "Modified Endowment Contract" by the



Internal Revenue Service (IRS), which negates many of the taxadvantages associated with life insurance. The insurance company, inmost cases, will inform the policy owner of this danger before applyingtheir premium.Tax deferred benefit from a life insurance policy may be offset by itslow return in some cases. This depends upon the insuring company, typeof policy and other variables (mortality, market return, etc.). Also, other

income tax saving vehicles (i.e. Individual Retirement Account (IRA),401K or Roth IRA ) may be better alternatives for value accumulation.This will depend on the individual and their specific circumstances.The tax ramifications of life insurance are complex. The policy owner would be well advised to carefully consider them. As always, the UnitedStates Congress or the state legislatures can change the tax laws at anytime.

Taxation of life assurance in the United KingdomPremiums are not usually allowable against income tax or corporationtax , however qualifying policies issued prior to 14 March 1984 do stillattract LAPR ( Life Assurance Premium Relief ) at 15% (with the net

premium being collected from the policyholder).

Non-investment life policies do not normally attract either income tax or capital gains tax on claim. If the policy has as investment element suchas an endowment policy, whole of life policy or an investment bond thenthe tax treatment is determined by the qualifying status of the policy.Qualifying status is determined at the outset of the policy if the contractmeets certain criteria. Essentially, long term contracts (10 years plus)tend to be qualifying policies and the proceeds are free from income taxand capital gains tax . Single premium contracts and those run for a shortterm are subject to income tax depending upon your marginal rate in the





assurance with tax relief on the premiums. All premiums are paid net of basic rate tax at 22%, and higher rate tax payers can gain an extra 18%tax relief via their tax return. Although not suitable for all, PTA briefly

became one of the most common forms of life assurance sold in the UK until the Chancellor, Gordon Brown , announced the withdrawal of thescheme in his pre-budget announcement on 6 December 2006. The taxrelief ceased to be available to new policies transacted after 6 December

2006, however, existing policies have been allowed to enjoy tax relief sofar.

HistoryInsurance began as a way of reducing the risk of traders, as early as 5000BC in China and 4500 BC in Babylon . Life insurance dates only toancient Rome; "burial clubs" covered the cost of members' funeralexpenses and helped survivors monetarily. Modern life insurance startedin late 17th century England , originally as insurance for traders:

merchants, ship owners and underwriters met to discuss deals at Lloyd'sCoffee House, predecessor to the famous Lloyd's of London .The first insurance company in the United States was formed inCharleston, South Carolina in 1732, but it provided only fire insurance.The sale of life insurance in the U.S. began in the late 1760s. ThePresbyterian Synods in Philadelphia and New York created theCorporation for Relief of Poor and Distressed Widows and Children of Presbyterian Ministers in 1759; Episcopalian priests organized a similar fund in 1769. Between 1787 and 1837 more than two dozen lifeinsurance companies were started, but fewer than half a dozen survived.Prior to the American Civil War , many insurance companies in theUnited States insured the lives of slaves for their owners. In response to

bills passed in California in 2001 and in Illinois in 2003, the companieshave been required to search their records for such policies. New York Life for example reported that Nautilus sold 485 slaveholder lifeinsurance policies during a two-year period in the 1840s; they added thattheir trustees voted to end the sale of such policies 15 years before the

Emancipation Proclamation .



CriticismAlthough some aspects of the application process (such as underwritingand insurable interest provisions) make it difficult, life insurance

policies have been used in cases of exploitation and fraud. In the case of life insurance, there is a motivation to purchase a life insurance policy,

particularly if the face value is substantial, and then kill the insured.The television series Forensic Files has included episodes that featurethis scenario. There was also a documented case in 2006, where twoelderly women are accused of taking in homeless men and assistingthem. As part of their assistance, they took out life insurance on the men.After the contestability period ended on the policies (most life contractshave a standard contestability period of two years), the women arealleged to have had the men killed via hit-and-run car crashes.

[9]

Recently, viatical settlements have thrown the life insurance industryinto turmoil. A viatical settlement involves the purchase of a lifeinsurance policy from an elderly or terminally ill policy holder. The

policy holder sells the policy (including the right to name the beneficiary) to a purchaser for a price discounted from the policy value.The seller has cash in hand, and the purchaser will realize a profit whenthe seller dies and the proceeds are delivered to the purchaser. In themeantime, the purchaser continues to pay the premiums. Although both

parties have reached an agreeable settlement, insurers are troubled bythis trend. Insurers calculate their rates with the assumption that a certain

portion of policy holders will seek to redeem the cash value of their insurance policies before death. They also expect that a certain portionwill stop paying premiums and forfeit their policies. However, viaticalsettlements ensure that such policies will with absolute certainty be paidout. Some purchasers, in order to take advantage of the potentially large

profits, have even actively sought to collude with uninsured elderly andterminally ill patients, and created policies that would have nototherwise been purchased. Likewise, these policies are guaranteed lossesfrom the insurers' perspective



PROPERTY INSURANCEThis tornado damage to an Illinois home would be considered an" Act of God " for insurance purposesProperty insurance provides protection against risks to property, such asfire, theft or weather damage. This includes specialized forms of insurance such as fire insurance , flood insurance , earthquakeinsurance , home insurance , inland marine insurance or boiler insurance .• Automobile insurance , known in the UK as motor insurance ,is probably the most common form of insurance and may cover bothlegal liability claims against the driver and loss of or damage to theinsured's vehicle itself. Throughout the United States an autoinsurance policy is required to legally operate a motor vehicle on publicroads. In some jurisdictions, bodily injury compensation for automobileaccident victims has been changed to a no-fault system, which reduces

or eliminates the ability to sue for compensation but provides automaticeligibility for benefits. Credit card companies insure against damageon rented cars.

o Driving School Insurance insurance provides cover for anyauthorized driver whilst undergoing tuition, cover also unlike other motor policies provides cover for instructor liability where both the

pupil and driving instructor are equally liable in the event of a claim.• Aviation insurance insures against hull, spares, deductibles,hull wear and liability risks.• Boiler insurance (also known as boiler and machineryinsurance or equipment breakdown insurance) insures against accidental

physical damage to equipment or machinery.• Builder's risk insurance insures against the risk of physicalloss or damage to property during construction. Builder's risk insuranceis typically written on an "all risk" basis covering damage due to anycause (including the negligence of the insured) not otherwise expresslyexcluded.

• Crop insurance "Farmers use crop insurance 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, for instance."• Earthquake insurance is a form of property insurance that

pays the policyholder in the event of an earthquake that causesdamage to the property. Most ordinary homeowners insurance

policies do not cover earthquake damage. Most earthquake insurance policies feature a high deductible . Rates depend on location and the

probability of an earthquake, as well as the construction of thehome .• A fidelity bond is a form of casualty insurance that covers

policyholders for losses that they incur as a result of fraudulent acts byspecified individuals. It usually insures a business for losses caused bythe dishonest acts of its employees.• Flood insurance protects against property loss due to flooding.Many insurers in the U.S. do not provide flood insurance in some

portions of the country. In response to this, the federal governmentcreated the National Flood Insurance Program which serves asthe insurer of last resort.

• Home insurance or homeowners' insurance: See "Propertyinsurance".• Marine insurance and marine cargo insurance cover the loss or damage of ships at sea or on inland waterways, and of the cargo that

may be on them. When the owner of the cargo and the carrier areseparate corporations, marine cargo insurance typically compensates theowner of cargo for losses sustained from fire, shipwreck, etc., butexcludes losses that can be recovered from the carrier or the carrier'sinsurance. Many marine insurance underwriters will include "timeelement" coverage in such policies, which extends the indemnity tocover loss of profit and other business expenses attributable to the delaycaused by a covered loss.• Surety bond insurance is a three party insurance guaranteeingthe performance of the principal.



• Terrorism insurance provides protection against any loss or damage caused by terrorist activities.• Volcano insurance is an insurance that covers volcano damagein Hawaii.• Windstorm insurance is an insurance covering the damagethat can be caused by hurricanes and tropical cyclones.

LIABILITY INSURANCELiability insurance is a very broad superset that covers legal claimsagainst the insured. Many types of insurance include an aspect of liability coverage. For example, a homeowner's insurance policy willnormally include liability coverage which protects the insured in theevent of a claim brought by someone who slips and falls on the property;automobile insurance also includes an aspect of liability insurance thatindemnifies 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 commencedagainst the policyholder and indemnification (payment on behalf of theinsured) with respect to a settlement or court verdict. Liability policiestypically cover only the negligence of the insured, and will not apply to



results of wilful or intentional acts by the insured.• Environmental liability insurance protects the insured from

bodily injury, property damage and cleanup costs as a result of thedispersal, release or escape of pollutants.• Errors and omissions insurance: See "Professional liabilityinsurance" under "Liability insurance".• Professional liability insurance , also called professional

indemnity insurance , protects insured professionals such as architecturalcorporation and medical practice against potential negligence claimsmade by their patients/clients. Professional liability insurance may takeon different names depending on the profession. For example,

professional liability insurance in reference to the medical professionmay be called malpractice insurance. Notaries public may take outerrors and omissions insurance (E&O). Other potential E&O

policyholders include, for example, real estate brokers, home inspectors,appraisers, and website developers.• Directors and officers liability insurance protects anorganization (usually a corporation) from costs associated with litigationresulting from mistakes made by directors and officers for which theyare liable. In the industry, it is usually called "D&O" for short.CREDIT INSURANCECredit insurance repays some or all of a loan when certain thingshappen to the borrower such as unemployment , disability , or death .• Mortgage insurance insures the lender against default by the

borrower. Mortgage insurance is a form of credit insurance, although thename credit insurance more often is used to refer to policies that cover other kinds of debt.OTHER TYPES• Collateral protection insurance or CPI, insures property(primarily vehicles) held as collateral for loans made by lendinginstitutions.



• Defense Base Act Workers' compensation or DBAInsurance provides coverage for civilian workers hired by thegovernment to perform contracts outside the U.S. and Canada. DBA isrequired for all U.S. citizens, U.S. residents, U.S. Green Card holders,and all employees or subcontractors hired on overseas governmentcontracts. Depending on the country, Foreign Nationals must also becovered 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 organizationsoperating outside of their home country with protection for automobiles,

property, health, liability and business pursuits.• Financial loss insurance protects individuals and companiesagainst various financial risks. For example, a business might

purchase coverage to protect it from loss of sales if a fire in a factory prevented it from carrying out its business for a time. Insurance mightalso cover the failure of a creditor to pay money it owes to theinsured. This type of insurance is frequently referred to as "businessinterruption insurance." Fidelity bonds and surety bonds areincluded in this category, although these products provide a benefit to athird party (the "obligee") in the event the insured party (usually referredto as the "obligor") fails to perform its obligations under a contract withthe obligee.

• Kidnap and ransom insurance • Locked funds insurance is a little-known hybrid insurance

policy jointly issued by governments and banks. It is used to protect public funds from tamper by unauthorized parties. In special cases, agovernment may authorize its use in protecting semi-private funds whichare liable to tamper. The terms of this type of insurance are usually verystrict. Therefore it is used only in extreme cases where maximumsecurity of funds is required.



• Pet insurance insures pets against accidents and illnesses -some companies cover routine/wellness care and burial, as well.• Pollution Insurance, which consists of first-party coverage for contamination of insured property either by external or on-site sources.Coverage for liability to third parties arising from contamination of air,water, or land due to the sudden and accidental release of hazardousmaterials from the insured site. The policy usually covers the costs 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 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.• Title insurance provides a guarantee that title to real

property is vested in the purchaser and/or mortgagee , free and clear of liens or encumbrances. It is usually issued in conjunction with asearch of the public records performed at the time of a real estatetransaction.• Travel insurance is an insurance cover taken by those whotravel abroad, which covers certain losses such as medical expenses, lossof personal belongings, travel delay, personal liabilities, etc.

Insurance financing vehicles• Protected Self-Insurance is an alternative risk financingmechanism in which an organization retains the mathematicallycalculated cost of risk within the organization and transfers thecatastrophic risk with specific and aggregate limits to an insurer so themaximum total cost of the program is known. A properly designed andunderwritten Protected Self-Insurance Program reduces and stabilizes



the cost of insurance and provides valuable risk managementinformation.• 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 currentyear's losses, although the premium adjustments may take months or years beyond the current year's expiration date. The rating formula isguaranteed 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.• Fraternal insurance is provided on a cooperative basis byfraternal benefit societies or other social organizations.

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• Formal self insurance is the deliberate decision to pay for otherwise insurable losses out of one's own money. This can be done ona formal basis by establishing a separate fund into which funds aredeposited on a periodic basis, or by simply forgoing the purchase of available insurance and paying out-of-pocket. Self insurance is usuallyused to pay for high-frequency, low-severity losses. Such losses, if covered by conventional insurance, mean having to pay a premium thatincludes loadings for the company's general expenses, cost of putting the

policy on the books, acquisition expenses, premium taxes, andcontingencies. While this is true for all insurance, for small, frequentlosses the transaction costs may exceed the benefit of volatility reductionthat insurance otherwise affords.• No-fault insurance is a type of insurance policy (typicallyautomobile insurance) where insureds are indemnified by their owninsurer regardless of fault in the incident.• Reinsurance is a type of insurance purchased by insurancecompanies or self-insured employers to protect against unexpectedlosses. Financial reinsurance is a form of reinsurance that is

primarily used for capital management rather than to transfer insurance



risk.• Stop-loss insurance provides protection against catastrophicor unpredictable losses. It is purchased by organizations who do notwant 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.• 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, disabilityincome insurance, unemployment insurance, health insurance, andothers), plus retirement savings, that requires participation by allcitizens. 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 alarge, complicated topic that engenders tremendous debate, which can befurther studied in the following articles (and others):

o Social welfare provision o Social security o Social safety net o National Insurance o Social Security (United States) o Social Security debate (United States)

CLOSED COMMUNITY SELF-INSURANCESome communities prefer to create virtual insurance amongstthemselves by other means than contractual risk transfer, which assignsexplicit 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 communitywho all bear the cost of rebuilding lost property and supporting peoplewhose needs are suddenly greater after a loss of some kind. Insupportive communities where others can be trusted to followcommunity 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 byinvoking 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 wascheaper than paying insurance premiums. Since many UK government

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

INSURANCE COMPANIESInsurance companies may be classified into two groups:

• Life insurance companies, which sell life insurance, annuities and



pensions products.• Non-life , General , or Property/Casualty insurance companies,

which sell other types 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 differentregulatory regimes and different tax and accounting rules. The mainreason for the distinction between the two types of company is that life,annuity, and pension business is very long-term in nature — coveragefor life assurance or a pension can cover risks over many decades . Bycontrast, non-life insurance cover usually covers a shorter period, suchas one year.In the United States, standard line insurance companies are "mainstream" insurers. These are the companies that typically insure autos,homes or businesses. They use pattern or "cookie-cutter" policieswithout variation from one person to the next. They usually have lower

premiums than excess lines and can sell directly to individuals. They areregulated by state laws that can restrict the amount they can charge for insurance policies.Excess line insurance companies (aka Excess and Surplus) typicallyinsure risks not covered by the standard lines market. They are broadlyreferred as being all insurance placed with non-admitted insurers. Non-

admitted insurers are not licensed in the states where the risks arelocated. These companies have more flexibility and can react faster thanstandard insurance companies because they are not required to file ratesand forms as the "admitted" carriers do. However, they still havesubstantial regulatory requirements placed upon them. State lawsgenerally require insurance placed with surplus line agents and brokersnot to be available through standard licensed insurers.Insurance companies are generally classified as either mutual or stock



companies. Mutual companies are owned by the policyholders, whilestockholders (who may or may not own policies) own stock insurancecompanies. Demutualization of mutual insurers to form stock companies, as well as the formation of a hybrid known as a mutualholding company , became common in some countries, such as theUnited States, in the late 20th century. Other possible forms for aninsurance company include reciprocals , in which policyholders

'reciprocate' in sharing risks, and Lloyds organizations.Insurance companies are rated by various agencies such as A. M. Best .The ratings include the company's financial strength, which measures itsability to pay claims. It also rates financial instruments issued by theinsurance company, such as bonds, notes, and securitization products.

Reinsurance companies are insurance companies that sell policiesto other insurance companies, allowing them to reduce their risks and

protect themselves from very large losses. The reinsurance market isdominated by a few very large companies, with huge reserves. Areinsurer may also be a direct writer of insurance risks as well.Captive insurance companies may be defined as limited-purposeinsurance companies established with the specific objective of financingrisks emanating from their parent group or groups. This definition cansometimes be extended to include some of the risks of the parentcompany'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). Captivesrepresent 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 theygenerate. Additionally, they may provide coverage of risks which isneither available nor offered in the traditional insurance market atreasonable 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 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 amortgage broker, these companies are paid a fee by the customer to shoparound for the best insurance policy amongst many companies. Similar to an insurance consultant, an 'insurance broker' also shops around for the best insurance policy amongst many companies. However, withinsurance brokers, the fee is usually paid in the form of commissionfrom the insurer that is selected rather than directly from the client.

Neither insurance consultants nor insurance brokers are insurancecompanies and no risks are transferred to them in insurance transactions.Third party administrators are companies that perform underwriting andsometimes claims handling services for insurance companies. These

companies often have special expertise that the insurance companies donot have.The financial stability and strength of an insurance company should be amajor consideration when buying an insurance contract. An insurance

premium paid currently provides coverage for losses that might arisemany years in the future. For that reason, the viability of the insurance



carrier is very important. In recent years, a number of insurancecompanies have become insolvent, leaving their policyholders with nocoverage (or coverage only from a government-backed insurance pool or other arrangement with less attractive payouts for losses). A number of independent rating agencies, such as Best's , Fitch , Standard &Poor's , and Moody's Investors Service , provide information andrate the financial viability of insurance companies.

GLOBAL INSURANCE INDUSTRYLife insurance premia written in 2005

Non-life insurance premia written in 2005Global insurance premiums grew by 8.0% in 2006 (or 5% in real terms)to reach $3.7 trillion due to improved profitability and a benigneconomic environment characterised by solid economic growth,moderate inflation and strong equity markets. Profitability improved in

both life and non-life insurance in 2006 compared to the previous year.

Life insurance premiums grew by 10.2% in 2006 as demand for annuityand pension products rose. Non-life insurance premiums grew by 5.0%due to growth in premium rates. Over the past decade, global insurance

premiums rose by more than a half as annual growth fluctuated between2% and 11%.Advanced economies account for the bulk of global insurance. With

premium income of $1,485bn, Europe was the most important region,followed by North America ($1,258bn) and Asia ($801bn). The top four countries accounted for nearly two-thirds of premiums in 2006. The U.S.and Japan alone accounted for 43% of world insurance, much higher than their 7% share of the global population. Emerging marketsaccounted for over 85% of the world’s population but generated onlyaround 10% of premiums. The volume of UK insurance business totalled$418bn in 2006 or 11.2% of global premiums.

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CONTROVERSIESInsurance insulates too much



By creating a "security blanket" for its insureds, an insurance companymay inadvertently find that its insureds may not be as risk-averse as theymight otherwise be (since, by definition, the insured has transferred therisk to the insurer). This problem is known to the insurance industry asmoral hazard . To reduce their own financial exposure, insurancecompanies 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 occupationsor engage in dangerous sports. Liability insurance providers do not

provide coverage for liability arising from intentional tortscommitted by the insured. Even if a provider were so irrational as towant to provide such coverage, it is against the public policy of mostcountries to allow such insurance to exist, and thus it is usually illegal.

Complexity of insurance policy contractsInsurance policies can be complex and some policyholders may notunderstand all the fees and coverages included in a policy. As a result,

people may buy policies on unfavorable terms. In response to theseissues, many countries have enacted detailed statutory and regulatoryregimes governing every aspect of the insurance business, includingminimum standards for policies and the ways in which they may beadvertised and sold.Many institutional insurance purchasers buy insurance through aninsurance broker. Brokers represent the buyer (not the insurancecompany), and typically counsel the buyer on appropriate coverage and

policy limitations. A broker generally holds contracts with manyinsurers, thereby allowing the broker to "shop" the market for the bestrates and coverage possible.Insurance may also be purchased through an agent.

Redlining

Redlining is the practice of denying insurance coverage in specific



geographic areas, supposedly because of a high likelihood of loss, whilethe alleged motivation is unlawful discrimination. Racial profiling or redlining has a long history in the property insurance industry in theUnited States. From a review of industry underwriting and marketingmaterials, court documents, and research by government agencies,industry and community groups, and academics, it is clear that race haslong affected and continues to affect the policies and practices of the

insurance industry.All states have provisions in their rate regulation laws or in their fair trade practice acts that prohibit unfair discrimination, often calledredlining, in setting rates and making insurance available.In determining premiums and premium rate structures, insurers consider quantifiable factors, including location, credit scores , gender ,occupation , marital status , and education level. However, theuse of such factors is often considered to be unfair or unlawfullydiscriminatory , and the reaction against this practice has in someinstances led to political disputes about the ways in which insurersdetermine premiums and regulatory intervention to limit the factorsused.An insurance underwriter's job is to evaluate a given risk as to thelikelihood 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 areto remain solvent. Thus, "discrimination" against (i.e., negative

differential treatment of) potential insureds in the risk evaluation and premium-setting process is a necessary by-product of the fundamentalsof insurance underwriting. For instance, insurers charge older peoplesignificantly higher premiums than they charge younger people for termlife insurance. Older people are thus treated differently than younger

people (i.e., a distinction is made, discrimination occurs). The rationalefor 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 soundreason for doing so is unlawful discrimination.What is often missing from the debate is that prohibiting the use of legitimate, actuarially sound factors means that an insufficient amount is

being charged for a given risk, and there is thus a deficit in the system.The failure to address the deficit may mean insolvency and hardship for

all of a company's insureds. The options for addressing the deficit seemto be the following: Charge the deficit to the other policyholders or charge it to the government (i.e., externalize outside of the company tosociety at large).Insurance patents

New insurance 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 inventedand patented by a major U.S. auto insurance company, ProgressiveAuto Insurance () and a Spanish independent inventor, Salvador Minguijon Perez .Many independent inventors are in favor of patenting new insurance

products since it gives them protection from big companies when they bring their new insurance products to market. Independent inventorsaccount for 70% of the new U.S. patent applications in this area. Onesuch example is titled "Method of Expediting Insurance Claims" Patent7,203,654 issued April 10, 2007.Many insurance executives are opposed to patenting insurance products

because it creates a new risk for them. The Hartford insurancecompany, for example, recently had to pay $80 million to anindependent inventor, Bancorp Services, in order to settle a patentinfringement and theft of trade secret lawsuit for a type of corporateowned life insurance product invented and patented by Bancorp.The insurance industry and rent seeking



Certain insurance products and practices have been described as rentseeking by critics. That is, some insurance products or practices areuseful primarily because of legal benefits, such as reducing taxes, asopposed to providing protection against risks of adverse events. Under United States tax law, for example, most owners of variableannuities 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 taxdeferral is the only reason people use these products. Another example isthe legal infrastructure which allows life insurance to be held in anirrevocable trust which is used to pay an estate tax while the proceedsthemselves are immune from the estate tax.Criticism of insurance companiesThe neutrality of this article is disputed .Please see the discussion on the talk page .

Please do not remove this message until the dispute is resolved.Some people believe that modern insurance companies are money-making businesses which have little interest in insurance. They arguethat the purpose of insurance is to spread risk so the reluctance of insurance companies to take on high-risk cases (e.g. houses in areassubject to flooding, or young drivers) runs counter to the principle of insurance.Other criticisms include:• Insurance policies contain too many exclusion clauses . For example, some house insurance policies do not cover damage to gardenwalls.• Many insurance companies now use call centres and staff attempt to answer questions by reading from a script. It is difficult tospeak to anybody with expert knowledge. While policyholders find their

premium payments decrease when dealing with companies who sacrificethe use of trained insurance agents , they also risk greater financialloss due to inadequate coverage protection. Those companies who invest



in educated insurance agents provide a valued service to thecommunity. Policyholders who work with knowledgeable insuranceagents are more likely to identify needs, evaluate options, purchasesufficient insurance protection, and minimize the risk of heavy financialloss for themselves and their family.



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