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TKOH: Taking the Mystery Out Of
Insurance: Knowing what you need: A Guide
The Greeks and Romans introduced the origins of health and life
insurance c. 600 AD when they organized guilds called "benevolent
societies" 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, "friendly
societies" existed in England, in which people donated amounts of
money to a general sum that could be used for emergencies.
Benjamin Franklin helped to popularize and make standard the
practice of insurance, particularly against fire in the form of
perpetual insurance. In 1752, he founded the Philadelphia
Contributionship for the Insurance of Houses from Loss by Fire.
Franklin's company was the first to make contributions toward fire
prevention. Not only did his company warn against certain fire
hazards, it refused to insure certain buildings where the risk of
fire was too great, such as all wooden houses.
TKOH and the Existence
of Closed Community Self-Insurance
Some communities prefer to create virtual
insurance amongst themselves by other means than contractual risk
transfer, which assigns explicit numerical values to risk. A number
of such groups as The Kingdom of Hearts and certain religious groups,
including the Amish and some Muslim groups, depend on support
provided by their communities when disasters strike. The risk
presented by any given person is assumed collectively by the
community who all bear the cost of rebuilding lost property and
supporting people whose needs are suddenly greater after a loss of
some kind. In supportive communities where others can be trusted to
follow community leaders, this tacit form of insurance can work. In
this manner the community can even out the extreme differences in
insurability that exist among its members. Some further
justification is also provided by invoking the moral hazard of
explicit insurance contracts.
In the United Kingdom The Crown (which, for
practical purposes, meant the Civil service) did not insure property
such as government buildings. If a government building was damaged,
the cost of repair would be met from public funds because, in the
long run, this was cheaper than paying insurance premiums. Since
many UK government buildings have been sold to property companies,
and rented back, this arrangement is now less common and may have
disappeared altogether.
Types of insurance
Any risk that can be quantified can potentially be insured. Specific
kinds of risk that may give rise to claims are known as "perils". An
insurance policy will set out in detail which perils are covered by
the policy and which are not.
- Automobile insurance, is probably the most common form of
insurance and may cover both legal liability claims against the
driver and loss of or damage to the insured's vehicle itself.
- Aviation insurance insures against hull, spares, deductible,
hull war and liability risks.
- Boiler insurance (also known as boiler and machinery
insurance or equipment breakdown insurance) insures against
accidental physical damage to equipment or machinery.
- Builder's risk insurance insures against the risk of
physical loss or damage to property during construction.
Builder's risk insurance is typically written on an "all risk"
basis covering damage due to any cause (including the negligence
of the insured) not otherwise expressly excluded.
- Business insurance can be any kind of insurance that
protects businesses against risks. Some principal subtypes of
business insurance are (a) the various kinds of professional
liability insurance, also called professional indemnity
insurance, which are discussed below under that name; and
(b) the business owners policy (BOP), which bundles into one
policy many of the kinds of coverage that a business owner
needs, in a way analogous to how homeowners insurance bundles
the coverages that a homeowner needs.
- Casualty insurance insures against accidents, not
necessarily tied to any specific property.
- Credit insurance repays some or all of a loan back when
certain things happen to the borrower such as unemployment,
disability, or death. Mortgage insurance is a form of credit
insurance, although the name credit insurance more often
is used to refer to policies that cover other kinds of debt.
- Crime insurance insures the policyholder against losses
arising from the criminal acts of third parties. For example, a
company can obtain crime insurance to cover losses arising from
theft or embezzlement.
- 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."
- Defense Base Act Workers' compensation or DBA Insurance
insurance provides coverage for civilian workers hired by the
government to perform contracts outside the US and Canada.
- Directors and officers liability insurance protects an
organization (usually a corporation) from costs associated with
litigation resulting from mistakes incurred by directors and
officers for which they are liable. In the industry, it is
usually called "D&O" for short.
- Disability insurance policies provide financial support in
the event the policyholder is unable to work because of
disabling illness or injury. It provides monthly support to help
pay such obligations as mortgages and credit cards.
- Total permanent disability insurance insurance provides
benefits when a person is permanently disabled and can no
longer work in their profession, often taken as an adjunct
to life insurance.
- Errors and omissions insurance: See "Professional liability
insurance" under "Liability insurance".
- Expatriate insurance provides individuals and organizations
operating outside of their home country with protection for
automobiles, property, health, liability and business pursuits.
- Financial loss insurance protects individuals and companies
against various financial risks. For example, a business might
purchase cover to protect it from loss of sales if a fire in a
factory prevented it from carrying out its business for a time.
Insurance might also cover the failure of a creditor to pay
money it owes to the insured. This type of insurance is
frequently referred to as "business interruption insurance."
Fidelity bonds and surety bonds are included in this category,
although these products provide a benefit to a third party (the
"obligee") in the event the insured party (usually referred to
as the "obligor") fails to perform its obligations under a
contract with the obligee.
- Fire insurance: See "Property insurance".
- Hazard insurance: See "Property insurance".
- Health insurance policies will often cover the cost of
private medical treatments if the National Health Service in the
UK (NHS) or other publicly-funded health programs do not pay for
them. It will often result in quicker health care where better
facilities are available.
- Kidnap and ransom insurance
- Home insurance or homeowners insurance: See "Property
insurance".
- Liability insurance is a very broad superset that covers
legal claims against the insured. Many types of insurance
include an aspect of liability coverage. For example, a
homeowner's insurance policy will normally include liability
coverage which protects the insured in the event of a claim
brought by someone who slips and falls on the property;
automobile insurance also includes an aspect of liability
insurance that indemnifies against the harm that a crashing car
can cause to others' lives, health, or property. The protection
offered by a liability insurance policy is twofold: a legal
defense in the event of a lawsuit commenced against the
policyholder and indemnification (payment on behalf of the
insured) with respect to a settlement or court verdict.
Liability policies typically cover only the negligence of the
insured, and will not apply to results of willful or intentional
acts by the insured.
- Environmental liability insurance protects the insured
from bodily injury, property damage and cleanup costs as a
result of the dispersal, release or escape of pollutants.
- Professional liability insurance, also called
professional indemnity insurance, protects professional
practitioners such as architects, lawyers, doctors, and
accountants against potential negligence claims made by
their patients/clients. Professional liability insurance may
take on different names depending on the profession. For
example, professional liability insurance in reference to
the medical profession may be called malpractice
insurance. Notaries public may take out errors and
omissions insurance (E&O). Other potential E&O
policyholders include, for example, real estate brokers,
home inspectors, appraisers, and website developers.
- Life insurance provides a monetary benefit to a decedent's
family or other designated beneficiary, and may specifically
provide for income to an insured person's family, burial,
funeral and other final expenses. Life insurance policies often
allow the option of having the proceeds paid to the beneficiary
either in a lump sum cash payment or an annuity.
- Annuities provide a stream of payments and are generally
classified as insurance because they are issued by insurance
companies and regulated as insurance and require the same
kinds of actuarial and investment management expertise that
life insurance requires. Annuities and pensions that pay a
benefit for life are sometimes regarded as insurance against
the possibility that a retiree will outlive his or her
financial resources. In that sense, they are the complement
of life insurance and, from an underwriting perspective, are
the mirror image of life insurance.
- 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, a government may authorize its use in protecting
semi-private funds which are liable to tamper. The terms of this
type of insurance are usually very strict. Therefore it is used
only in extreme cases where maximum security of funds is
required.
- 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 are separate corporations, marine cargo insurance
typically compensates the owner of cargo for losses sustained
from fire, shipwreck, etc., but excludes losses that can be
recovered from the carrier or the carrier's insurance. Many
marine insurance underwriters will include "time element"
coverage in such policies, which extends the indemnity to cover
loss of profit and other business expenses attributable to the
delay caused by a covered loss.
- Medical, dental and eye.
- Mortgage insurance insures the lender against default by the
borrower.
- National Insurance is the UK's version of social insurance.
- No-fault insurance is a type of insurance policy (typically
automobile insurance) where insureds are indemnified by their
own insurer regardless of fault in the incident.
- Nuclear incident insurance covers damages resulting from an
incident involving radioactive materials and is generally
arranged at the national level.
- Pet insurance insures pets against accidents and illnesses -
some companies cover routine/wellness care and burial, as well.
- Political risk insurance can be taken out by businesses with
operations in countries in which there is a risk that revolution
or other political conditions will result in a loss.
- Pollution Insurance. A 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 hazardous materials from the insured site.
The policy usually covers the costs of cleanup and may include
coverage for releases from underground storage tanks.
Intentional acts are specifically excluded
- Property insurance provides protection against risks to
property, such as fire, theft or weather damage. This includes
specialized forms of insurance such as fire insurance, flood
insurance, earthquake insurance, home insurance, inland marine
insurance or boiler insurance.
- 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.
- Retrospectively Rated Insurance is a method of establishing
a premium on large commercial accounts. The final premium is
based on the insured's actual loss experience during the policy
term, sometimes subject to a minimum and maximum premium, with
the final premium determined by a formula. Under this plan, the
current year's premium is based partially (or wholly) on the
current year's losses, although the premium adjustments may take
months or years beyond the current year's expiration date. The
rating formula is guaranteed in the insurance contract. Formula:
retrospective premium = converted loss + basic premium × tax
multiplier. Numerous variations of this formula have been
developed and are in use.
- Social insurance can be many things to many people in many
countries. But a summary of its essence is that it is a
collection of insurance coverages (including components of life
insurance, disability income insurance, unemployment insurance,
health insurance, and others), plus retirement savings, that
mandates participation by all citizens. By forcing everyone in
society to be a policyholder and pay premiums, it ensures that
everyone can become a claimant when or if he/she needs to. Along
the way this inevitably becomes related to other concepts such
as the justice system and the welfare state.
- Surety Bond insurance is a three party insurance
guaranteeing the performance of the principal.
- Terrorism insurance provides protection against any loss or
damage caused by terrorist activities.
- 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 a search of the public records performed at the
time of a real estate transaction.
- Travel insurance is an insurance cover taken by those who
travel abroad, which covers certain losses such as medical
expenses, lost of personal belongings, travel delay, personal
liabilities, etc.
- Volcano insurance is an insurance that covers volcano damage
in Hawaii.
- Workers' compensation insurance replaces all or part of a
worker's wages lost and accompanying medical expense incurred
because of a job-related injury.
Criticism of insurance
companies
Some people believe that modern insurance
companies are money-making businesses which have little interest in
insurance. They argue that the purpose of insurance is to spread
risk so the reluctance of insurance companies to take on high-risk
cases (e.g. houses in areas subject 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
garden walls.
- Most insurance companies now use call centres and staff
attempt to answer questions by reading from a script. It is
difficult to speak to anybody with expert knowledge.
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