Insurance Companies
Insurance companies provide (sell and service) insurance policies, which are legally binding contracts for which the policyholder or owner) pays insurance premiums. According to the insurance contract, insurance companies promise to pay specified sums contingent on the occurrence of future events, such as death or as an automobile accident. Thus, insurance companies are risk bearers. They accept or underwrite the risk in return for an insurance premium.
The major part of the insurance company underwriting process is deciding which applications for insurance they should accept and which ones they should accept and which ones they should reject, and if they accept, determining how much they should charge for the insurance. This is called the underwriting process. For e.g. an insurance company may not provide life insurance to someone with terminal cancer or automobile insurance to someone with numerous traffic violations. Moreover, in some cases, they may provide different classes of insurance with different premiums. For e.g. the company may insure but charge a smoker a larger premium for life insurance than a non-smoker; and insure someone with a mediocre driving record, but charge more for automobile insurance than an individual with a better driving record. The underwriting process is critical to an insurance company.
Because insurance companies collect insurance premiums initially and make payments later when (e.g. the insured persons death) or if (e.g. an automobile accident) an insured event occurs, insurance companies maintain the initial premiums collected in an investment portfolio, which generates a return. Thus, insurance companies have two sources of income: the initial underwriting income (the insurance premium) and the investment income, which occurs over time. The investment returns result from the investment of the insurance premiums until the funds are paid out on the policy. The premium is a stable type of revenue. Investment returns may vary considerably with the performance of the financial markets.
The payments on the insurance policies are one major expense of the insurance company. These payments vary among the different types of insurance policies and companies. The payments may be very unstable, depending upon the type of insurance. The other major type of expense is the operating
expense of the insurance company. This expense tends to be quite stable. Insurance companys profits, thus, result from the difference between their insurance premiums and investment returns on the one hand, and their operating expense and insurance payments or benefits on the other. The type of risk insured against, which defines the type of premium, collected and benefit paid, defines the insurance company.
Types of Insurance:
Life Insurance
For life insurance, the risk insured against is death. The life insurance company pays the beneficiary of the life insurance policy in the event of the death of the insured.
Health Insurance
In the case of health insurance, the risk insured is medical treatment of the insured. The health insurance company pays the insured (or the provider of the medical service) all or a portion of the cost of medical treatment by doctors, hospitals, or others. This type of insurance has undergone significant changes in the last decade. As a result, there has been a significant restructuring of the health industry, whereby the largest health insurance companies specialize in health insurance rather than sell health insurance in addition to other products, such as life insurance.
Until the last decade, the major type of health insurance available was indemnity insurance. According to indemnity insurance, the insurance company agrees to indemnify the insured for covered medical and hospital expenses. That is, the insurance company will be paying the medical provider for the medical services provided to the insured. The provider is selected by the insured and provides whatever service the provider deems appropriate.
Very often, there is an annual minimum amount below which the issuer does not pay for the service, but the insured pays (a deductible). Typically, there is also a co-payment (a co-pay• ) required by the insured. For e.g. the insured pays 20% of the charge for the service and the insurer pays the other 80%.
The two major classes of medical expense benefits are:
Basic Coverage: Traditional hospital, surgical, and regular expense coverage; and Major Medical: designed to reduce the financial burden of heavy medical expenses resulting from catastrophic or prolonged illness or injury.
Property and Casualty Insurance:
The risk insured by Property and Casualty Insurance an insurance company is damage to various types of property. Specifically, it is insurance against financial loss caused by damage, destruction, or loss to property as the result of an identifiable event that is sudden, unexpected, or unusual. The major types of such insurance are:
• A house and its contents against risks such as firs, flood, and theft (home owners insurance and its variants); and
• Vehicles against collision, theft, and other damage (automobile insurance and its variants)
Disability Insurance:
Disability insurance insures against the inability of employed persons to earn an income in either to either their own occupation or any occupation. Typically, own occ• disability insurance is written for professionals in white-collar occupations and any occ for blue-collar workers. Another distinction in disability insurance is the sustainability of the policy. Regarding sustainability, there are two types of policies. The first is guaranteed renewable whereby the issuer has to sustain the policy for the specified period of time and the issuer cannot make any changes in the policy except that it can change the premium rates for the entire class of policy. The other type is non-cancelable and guaranteed renewable whereby the issuer has no right to make any change in any policy during the specified period. Disability insurance is also divided between short-term disability and long-term disability, with six months being the typical dividing time.
Long-Term Care Insurance:
As individuals have been living longer, they have become concerned about outliving their assets and being unable to care for themselves as they age. In addition, custodial care for the aged has become very expensive. Thus, there has been an increased demand for insurance to provide custodial care for the aged who are no longer able to care for them. This care may be provided in either the insureds own residence or a separate custodial facility.
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