Learn About Insurance, Car Insurance, Life Insurance, Health Insurance, Medical Insurance


Tuesday, March 22, 2005


In insurance, the transfer of risk from a reinsurer to another reinsurer is called a retrocession, which can therefore be characterised as reinsurance company to reinsurance company insurance. By accepting the business being reinsured by another reinsurer, the accepting reinsurer becomes a retrocessionaire.

It is not unusual for a reinsurer to buy reinsurance protection from other reinsurers. For example, a reinsurer which provides proportional, or pro-rata, reinsurance capacity to insurance companies may wish to protect its own exposure to catastrophes by buying excess of loss protection.

Or, a reinsurer which provides excess of loss reinsurance protection may wish to protect itself against an accumulation of losses in different branches of business which may all become affected by the same catastrophe. This may happen when a windstorm causes damage to property, automobiles, boats, aircraft and loss of life.

Friday, March 18, 2005


Reinsurance refers to the situations where insurance companies insure against losses they may incur.

Insurance companies have a limited amount of capital, and to protect this capital they will often attempt to cap the net losses that they may incur by purchasing reinsurance.
A number of different types of reinsurance are available. The two main types are proportional reinsurance and non-proportional reinsurance.

Proportional reinsurance is where the reinsurer takes a stated share of each policy the insurer writes and then shares in the premiums and losses in that same proportion. The capital held by the insurer might only allow it to accept a risk with a value of $1 million but purchasing proportional reinsurance might allow it to, for example, double or triple its acceptance limit. Premiums and Losses are then shared on a proportional basis.

Non-proportional (Excess of Loss)
Non-proportional reinsurance (or Excess of Loss) only responds if the loss suffered by the insurer exceeds a certain amount (retention). An example of this form of reinsurance is where the insurer is prepared to accept a loss of $1 million for any loss which may occur and purchases a layer of reinsurance of $4m in excess of $1 million - if a loss of $3 million occurs the insurer pays the $3 million to the insured, and then recovers $2 million from their reinsurer(s). In this example, the insurer will retain for their own account any loss exceeding $5 million unless they have purchased a further excess layer (2nd layer)of say $5 million excess of $5 million.

Excess of Loss Reinsurance can have two forms - Per Risk or Per Occurrence ( Catastrophe or "Cat"). In Per Risk, the Insurance policy limits are exposed within the Reinsurance limits. for example, the insurance company might insure commerical property risks with policy limits up to $10 million, and then buy per risk reinsurance of $5 million xs $5 million. In Catastrophe Excess the insurance policy limits must be less than the reinsurance retention. for example, an insurance company issues homeowner's policy limits of up to $500,000 and then buys catastrophe reinsurance of $22,000,000 xs of $3,000,000. In that case, the insurance company would only recover from reinsurers in the event of multiple losses in one event (i.e hurricane, earthquake, etc.).

Most of the above examples concern reinsurance contracts that cover more than one policy (treaty). However, reinsurance can also be purchased on a per policy basis, in which case it is known as facultative reinsurance.

Many reinsurances are not placed with a single reinsurer but are shared between a number of reinsurers. (for example a $30,000,000 xs of $20,000,000 layer may be shared by 30 reinsurers with a $1,000,000 participation each) The reinsurer who sets the terms (premium and contract conditions) for the reinsurance contract is called the lead reinsurer; the other companies subscribing to the contract are called following reinsurers. (They follow the lead)

About half of all reinsurance is placed by reinsurance brokers, who then place business with Reinsurance companies. The other half is with "Direct Writing" Reinsurers who reinsure Insurance companies directly.

Reinsurance companies themselves also purchase reinsurance and this is typically known as retrocessional cover.

It is important to note that the Insurance Company is obligated to indemnify their policyholder for the loss under the insurance policy whether or not the Reinsurer actually reimburses the Insurer. Many insurance companies have gotten into trouble by purchasing reinsurance from reinsurance companies that did not pay their share of the loss. In a 50% quota share the Insurance Company could then be left with half the premium and the entire loss! This is a genuine concern when purchasing reinsurance from a reinsurer that is not domiciled in the same country as the insurer. Many Reinsurance Companies in Australia and the UK did indeed go out of business in the late 90's and did not pay their losses. Remember that losses come after premium, and for certain lines of casualty business (asbestos or pollution) the losses can come many many years later.

Thursday, March 17, 2005


Statistics is the science and practice of developing human knowledge through the use of empirical data expressed in quantitative form. It is based on statistical theory which is a branch of applied mathematics. Within statistical theory, randomness and uncertainty are modelled by probability theory. Because one aim of statistics is to produce the "best" information from available data, some authors consider statistics a branch of decision theory. Statistical practice includes the planning, summarizing, and interpreting of observations, allowing for variability and uncertainty.

Monday, March 14, 2005


Risk is the potential harm that may arise from some present process or from some future event. It is often mapped to the probability of some event which is seen as undesirable. Usually the probability of that event and some assessment of its expected harm must be combined into a believable scenario (an outcome) which combines the set of risk, regret and reward probabilities into an expected value for that outcome. There are many informal methods which are used to assess (or to "measure" although it is not usually possible to directly measure) risk, and (for some applications) formal methods such as value at risk.

In futures trading Risk, is a loss of trading capital.

Risk is different from threat
In scenario analysis "risk" is distinct from "threat." A threat is a very low-probability but serious event - which some analysts may be unable to assign a probability in a risk assessment because it has never occurred, and for which no effective preventive measure (a step taken to reduce the probability or impact of a possible future event) is available. The difference is most clearly illustrated by the precautionary principle which seeks to reduce threat by requiring it to be reduced to a set of well-defined risks before an action, project, innovation or experiment is allowed to proceed.

A more specific example is the preparedness of the United States of America prior to the devastating attack on September 11th, 2001. Although the Central Intelligence Agency had often warned of a "clear and present danger" of using planes as weapons, this was considered a threat, not a risk. Accordingly, no comprehensive scenarios of probabilities and counter-measures were ever prepared for the type of attack that occurred. Taking a frequentist probability approach, a threat cannot be characterized as a risk without at least one specific incident wherein the threat can be said to have "realized". From that point, there is at least some basis to characterize a probability, e.g. "in the entire history of air travel, X flights have led to 1 incident of..." By contrast Bayesian probability methods would allow threats to be assigned a degree of belief, even if they had never happened before, and this could then be treated as a probability.

In information security a "risk" is defined as the probability that a threat will act on a vulnerability to cause an impact, in other words a risk represents the chance coincidence of all three elements. Threats in this context include deliberate/directed acts (e.g. by hackers) and undirected/random/unpredictable events (such as a lightening strike). Vulnerabilities are generally caused by weaknesses in the system of preventive controls, including missing or ineffective procedural or technical controls, bugs in systems etc. Impacts are adverse effects on organizations, individuals or indeed society at large. A vulnerability is not an issue per se unless a threat exploits it and causes an impact. Risk management therefore involves minimizing the threats, vulnerabilities and/or impacts.

Professions and governments manage risk
Means of measuring and assessing risk vary widely across different professions--indeed, means of doing so may define different professions, e.g. a doctor manages medical risk, a civil engineer manages risk of structural failure, etc.

A professional code of ethics is usually focused on risk assessment and mitigation (by the professional on behalf of client, public, society or life in general).
Some theorists of political science, notably Carol Moore and Jane Jacobs, emphasize that smaller political units and careful separation of the roles of regulator and trader can improve professional ethics and subordinate them to uniform risk limits that would apply to a particular locale, e.g. an entire urban area.

The political ideal of bioregional democracy arose in part in response to these ideals, and problems of professional jargons and associations alienating power from real people living in real places.

"A profession by definition is in a conflict of interest with respect to the risk passed on to its clients." - Steven Rapaport.

Risk as regret
Risk has no one definition, but some theorists, notably Ron Dembo, have defined quite general methods to assess risk as an expected after-the-fact level of regret. Such methods have been uniquely successful in limiting interest rate risk in financial markets. Financial markets are considered to be a proving ground for general methods of risk assessment.

However, these methods are also hard to understand. The mathematical difficulties interfere with other social goods such as disclosure, valuation and transparency.

In particular, it is often difficult to tell if such financial instruments are "hedging" (decreasing measurable risk by giving up certain windfall gains) or "gambling" (increasing measurable risk and exposing the investor to catastrophic loss in pursuit of very high windfalls that increase expected value).

As regret measures rarely reflect actual human risk-aversion, it is difficult to determine if the outcomes of such transactions will be satisfactory. Risk seeking describes an individual who cares more about the potential gains than about the expected gains from an investment. For example, an individual who invests in a small stock, knowing there is a large chance of losing some money, but a small chance of making a great deal of money.

In financial markets one may need to measure credit risk, information timing and source risk, probability model risk, and legal risk if there are regulatory or civil actions taken as a result of some "investor's regret".

Tough choices
Financial markets illustrate a more general problem in defining and assessing risk-- the ways that different types of risk combine.

It can be hard to see how the relative risks from different sources should affect one's decisions. For example, when treating a disease a doctor might have the choice of either using a drug that had a high probability of causing minor side effects, or carrying out an operation with a low probability of causing very severe damage.

According to the regret theory, the only way to resolve such dilemmas might be to find out more about the patient's life and ambitions. If, for instance, the patient's greatest desire centered on raising children, one might prefer the drug even if it limited their mobility or physical capacity somewhat. However, if the patient has already risked their own life several times in extreme sporting events, the decision to do so one more time and recover full capacities may be far preferable.

This highlights a major problem in professional ethics: knowing when the cognitive bias of the professional versus the client (or "patient") must dominate, and what choices each is best able to make.

Framing is a fundamental problem with all forms of risk assessment. The above examples: body, threat, price of life, professional ethics and regret show that the risk adjustor or assessor often faces serious conflict of interest, The assessor also faces cognitive bias and cultural bias, and cannot always be trusted to avoid all moral hazards. This represents a risk in itself, which grows as the assessor is less like the client.

For instance, an extremely disturbing event that all participants wish not to happen again may be ignored in analysis despite the fact it has occurred and has a nonzero probability. Or, an event that everyone agrees is inevitable may be ruled out of analysis due to greed or an unwillingness to admit that it is believed to be inevitable.

These human tendencies to error and wishful thinking often affect even the most rigorous applications of the scientific method and are a major concern of the philosophy of science.
But all decision-making under uncertainty must consider cognitive bias, cultural bias, and notational bias: No group of people assessing risk is immune to "groupthink": acceptance of obviously-wrong answers simply because it is socially painful to disagree.

One effective way to solve framing problems in risk assessment or measurement (although some argue that risk cannot be measured, only assessed) is to ensure that scenarios, as a strict rule, must include unpopular and perhaps unbelievable (to the group) high-impact low-probability "threat" and/or "vision" events.

This permits participants in risk assessment to raise others' fears or personal ideals by way of completeness, without others concluding that they have done so for any reason other than satisfying this formal requirement.

For example, an intelligence analyst with a scenario for an attack by hijacking might have been able to insert mitigation for this threat into the U.S. budget. It would be admitted as a formal risk with a nominal low probability. This would permit coping with threats even though the threats were dismissed by the analyst's superiors.

Even small investments in diligence on this matter might have disrupted or prevented the attack-- or at least "hedged" against the risk that an Administration might be mistaken.

Although military decision making tends to dominate risk theory, its most sophisticated daily practice is in the insurance industry,

The insurers have well-defined roles of actuary, underwriter, agent, auditor and adjustor. Each of these is an assessor in somewhat different circumstances or stages of the insuring, reinsuring, adjustment, recovery and claims payment processes.


Actuaries are professionals who analyse the financial impact of risk, particularly looking ahead far into the future. Actuaries use skills in mathematics, economics, finance and statistics to study uncertain future events, especially those of concern to insurance companies, employee benefits such as medical insurance and pension plans, and social welfare programs such as social security and Medicare.

The main and classical functions of actuaries are to compute premiums for insurance and reserves. Reserves are similar to liabilities and indicate how much should be set aside now to provide for future payouts. If you inspect the balance sheet of an insurance company, you will find that the liability side consists mainly of reserves.

In some countries, becoming a fully certified actuary requires passing a rigorous series of exams, which takes several years, much of it after college and while working. For instance, in the U.S. the exams are given by the Society of Actuaries and the Casualty Actuarial Society. These align with the two major branches of actuarial work. The first deals with life matters such as life insurance, annuities, pensions, disability and medical insurance. The second, which in some countries is called general insurance, deals with property and casualty (or liability) matters such as autos, homeowners, commercial property insurance, workers compensation, title insurance, medical malpractice insurance, products liability insurance, directors and officers liability insurance, and other types of liability insurance.

Usually an actuary's job will involve quantifying how much a sum of money or financial liability will be worth at different points in the future. Since this is not a deterministic process, stochastic models are used to determine a distribution and the parameters of the distribution. This work may relate to determining the cost of a financial liability that has already occurred, or development or re-pricing of a new product.

Recently the scope of the actuarial field has widened to include investment advice, and even asset management.

Actuaries will typically be employed in insurance companies, consulting firms (i.e. firms that sell actuarial advice and analysis to other companies), or government departments, such as the Government Actuary's Department in the UK. Many belong to one or more professional bodies, which include:

  • the Casualty Actuarial Society, Society of Actuaries and the American Academy of Actuaries in the US;
  • the Institute of Actuaries in England and Wales; the Faculty of Actuaries in Scotland;
  • the Institute of Actuaries of Australia in Australia; the Canadian Institute of Actuaries;
  • the Deutsche Aktuarvereinigung e.V. in Germany;
  • the Actuarieel Genootschap in The Netherlands;
  • the Royal Association of Belgian Actuaries in Belgium;
  • the Danish Actuarial Society; the Society of Actuaries in Ireland in Ireland;
  • the Hungarian Actuarial Society in Hungary;
  • the International Actuarial Association;
  • the International Association of Consulting Actuaries;
  • the Groupe Consultatif of the European Union.

Actuarial Science

Actuarial science applies mathematical and statistical methods to finance and insurance, particularly to the assessment of risk. Actuaries are professionals who are qualified in this field.

Actuarial science includes a number of interrelating disciplines, in particular the mathematics of probability and statistics. In the life insurance industry, traditional actuarial science focuses on the analysis of mortality and the production of life tables, and the application of compound interest.

More recently, actuarial science has come to embrace more sophisticated mathematical modelling of finance. Ideas from financial economics are also becoming increasingly influential in actuarial thinking.

Saturday, March 12, 2005

Workers' Compensation

Workers' compensation programs and laws exist to protect employees who are injured while on the job. These laws are usually a feature of highly developed industrial societies. Workers' compensation laws are often only implemented after long and hard fought struggles by labour unions. There are often benefits available to dependents of workers killed on the job.

Workers' compensation laws were first enacted in Europe and Oceania, with the United States following shortly thereafter. Workers' compensation programs were a key component of the labour structure of the former Soviet Union and soviet-style societies.

Compensation prior to statutory law
Prior to statutory law, employees who were injured on the job were only able to pursue their employer through civil or torts law. In some countries like the United Kingdom this was difficult due to the legal view of employment as a master-servant relationship. Proof of employer malice or negligence was usually required, a difficult thing for an employee to prove. While employer liability was unlimited, courts usually awarded in favour of the employer, and did not take into account the full losses experienced by workers: medical costs, lost wages, and damages for loss of future earning capacity.

Statutory compensation law
Statutory compensation law provided a number of advantages to both employees and employers. Employees have been guarenteed fixed and dependable payments to compensate for injuries. Employers have been guarenteed fixed and dependable liabilities, which may be insured against. However, the specific form of the statutory compensation scheme may provide detriments. Statutory schemes often award a set amount based on the level of injury: so much for a toe, so much for an arm to the shoulder, so much for total spinal injury. These payments are based on the ability of the worker to find employment in a partial capacity: a worker who has lost an arm can still find work as a proportion of a fully-able person. This does not account for the difficulty in finding work suiting disablity. When employers are required to put injured staff on "light-duties" the employer may simply state that no light duty work exists, and sack the worker as unable to fulfill specified duties. When new forms of workplace injury are discovered, for instance: stress repetitive strain injury silicosis; the law often lags behind actual injury and offers no suitable compensation, forcing the employer and employee back to the courts. Finally, caps on the value of disabilities may not reflect the total cost of providing for a disabled worker. The government may legislate the value of total spinal incapacity at far below the amount required to keep a worker in reasonable living for the remainder of their life.

Statutory compensation in Australia
As Australia experienced a relatively influential labour movement in the late 19th and early 20th century, statutory compensation was implemented very early in Australia. Current systems of compensation inclued Workcover in New South Wales.

Statutory compensation in the United States
The first US law was passed in Maryland in 1902. In the next twenty years, many states followed. Workers' Compensation laws were enacted to mitigate court costs for both sides and to eliminate the need for injured workers to prove their injuries were the employer's "fault." In the United States most employees who are injured on the job have an absolute right to medical care for that injury, and in many cases monetary payments to compensate for resulting temporary or permanent disabilities. This system was formerly known as workman's compensation.

Most employers are required to carry workers' compensation insurance, and in most states there are heavy financial penalties for an employer's not having insurance. In many states there are public uninsured employer funds to pay benefits to workers employed by companies who illegally fail to purchase insurance. Insurance policies are available to employers through commercial insurance companies: if the employer is deemed an excessive risk to insure at market rates, it can obtain coverage through an assigned-risk program.

It is illegal in some states (although not in others) for an employer to fire an employee for reporting a workplace injury or for filing a workers' compensation claim; it is illegal to not hire someone for having filed a workers' compensation claim in the past. However, employers can consult commercial databases of claims data and it would seem nearly impossible to prove that an employer discriminated against a job applicant because of his or her workers' compensation claims history. To ameliorate against discrimination of this type, some states have created a "subsequent injury trust fund" which will reimburse insurers for benefits paid to workers who suffer aggravation or recurrence of a compensable injury.

It is also illegal to falsely claim workers' compensation benefits. Some employers hire private investigators to surreptitiously videotape claimants; some of these "sub rosa' videos have shown employees, who claimed to be disabled, engaging in sports or other strenuous physical activity. TV shows have recently been made using these videos.

Opposition to statutory compensaion in the United States
Opponents argue that Workers' Compensation laws may negatively impact the U.S. workers they were designed to help. Large employers may have an incentive to move segments of their business -- and their jobs -- to areas where workers' compensation benefits (and other employee protections) are less generous or are harder to obtain. This is because the United States lacks a unified and national set of employee entitlements covering minimum wage, wage and hour, or collective bargaining rights in addition to compensation. Labour unions describe this system as a race to the bottom, as state legislatures cut employee entitlements to attract capital.

United States employers can also move some operations to foreign countries where employee entitlements are much lower than in the U.S., and where there may be no Workers' Compensation or other legal remedies at all for workers who are injured or who are exposed to hazardous substances while on the job. Such countries may also have few or no legal protections available for employees in areas such as job discrimination, social security, or the right to organize or to join a union.

Some employers vigorously contest employee claims for workers' compensation payments; in any contested case, or in any case involving serious injury, an attorney with specific experience in handling workers' compensation claims on behalf of injured workers should be consulted. Many if not most state laws provide that a claimant's attorney fees are limited to a certain percentage of an award, and may be paid only from a successful recovery or award.

Some small business owners complain that the cost of Workers’ Compensation, which they pay in the form of insurance premiums, places a heavy burden on them.

Economists who favor the distributism system of economics cite Workers compensation as an example of how far the modern capitalist economic system approaches what they call the "servile state" or "slavery worker" system. They say that in past times when ownership of the means of production were more widely distributed, it would not be natural to hold an employer responsible for a workers injury, since the worker was freely choosing to work for that employer. Distributists assert that in modern times, with the vast majority of people dispossessed of the means of production, requireing employers to have workers compensation shows how much workers really are dependent on being employed and are essentially forced to work for someone else to survive. Some distributists who feel that capitalism is heading unstoppably in the direction of a slavery system, feel that this will come about by workers exchanging their personal freedoms for economic benefits like workers compensation.

Thursday, March 10, 2005

Credit Insurance

Credit Insurance is an insurance policy associated with a specific loan or line of credit which pays back some or all of any monies owed should certain things happen to the borrower, such as death, disability, or unemployment.

The costs (called a "premium") for this are usually charged monthly, depending on the balance owed, and depending on the usage of the loan or line, could almost double the cost of it (on the opposite spectrum clever usage could avoid having to pay almost any premium at all).

The sale of credit insurance is controversial because it is almost always cheaper for an individual to forgo credit insurance, and instead have a term life insurance or disability insurance policy to cover the credit balance. The reason is that credit insurance is guaranteed issue, no matter if a person would otherwise be insurable or not. So the rates offered must reflect this, and be worse than if a healthy or other wise insurable person were to purchse coverage on their own.

In addition, there is an even more controversial practice (called single premium credit insurance), usually associated with the sub prime lending industry, of charging the premium only one time at the beginning of the loan. For example, charging 5,000 dollars at the time of a mortgage refinance, which is usually financed (added to the total loan amount) as part of the loan. This is considered very bad by critics, since doing this is only cheaper if one is sure that one is going to stay with the loan forever and not refinance. Critics contend most people do not realize this and lose money by refinancing once again, thereby losing the benefits of the credit insurance.


The term annuity in current use in the insurance industry, refers to two very different types of legal contracts with very different purposes. Traditionally, for at least four hundred years, the term annuity referred to what is more correctly called today an immediate annuity. This is an insurance policy which makes a series of either level or fluctuating payments, paid out over a fixed number of years or during the lifetime(s) of one or two individuals, or in any combination of lifetime plus period certain guarantees. The overarching characteristic of the immediate annuity is that it is a vehicle for distributing savings. A common use for an immediate annuity might be to provide a pension income to a person who is about to retire.

The second usage for the term annuity came into its own during the 1970s. This contract is more correctly referred to as a deferred annuity and is chiefly a vehicle for accumulating savings. Note, this is different from the immediate and is the cause of much confusion when people discuss annuities without carefully defining which type of annuity they have in mind.

Under the heading of deferred annuities are contracts which may be similar to bank certificates of deposit (CD) in that they offer the buyer a safe interest rate return on his money; to stock index funds or other stock funds, where the growth of the account is dependent upon the performance of the market. All varieties of deferred annuities have one thing in common: any increase in account values is not taxed until those gains are withdrawn. This is also known as tax-deferred growth.

To complete the definitions here, a deferred annuity which grows by interest rate earnings alone is correctly called a fixed deferred annuity. A deferred annuity that permits allocations to stock or bond funds and for which the account value is not guaranteed to stay above the initial amount invested is correctly called a variable annuity. In the last ten years a new category of deferred annuities have emerged, called equity indexed annuities (EIAs). These policies are a hybrid of the two types of deferred annuities just described. The EIA offers a guarantee that the account value will never drop below the initial amount invested while also offering a chance to participate in the upside potential of any increase in the value of a major stock index, such as the S&P500 or Dow Jones Industrial Average.

By law an annuity contract can only be "manufactured" by an insurance company. They are distributed by, and available for purchase from, duly licensed bank, stock brokerage, and insurance company representatives. Some annuities may also be purchased directly from the "manufacturer," i.e., the insurance company writing the contract.

In a typical immediate annuity contract, an individual would pay a lump sum or a series of payments (called premiums) to an insurance company, and in return receive a fixed income payable for the rest of their life. The exact terms of an annuity product are drawn up in legal terms in a contract.

As well as referring to insurance products, it is common in finance theory to call any stream of fixed payments over a specified period of time an annuity. This usage is most commonly seen in academic discussions of finance, usually in connection with the valuation of the stream of payments, taking into account time value of money concepts.

At a cost to the payments, an annuity can be purchased with addition of another life such as a spouse on whose life the annuity is wholly or partly guaranteed. For example, it is common to buy an annuity which will continue to pay out to the spouse of the annuitant after his death, for as long as the spouse survives. The annuity paid to the spouse is called a reversionary annuity.

Payment options
Upon immediate annuitization, a wide variety of options are available in the way the stream of payments is paid. If it is paid over the life of the annuitant (the person receiving the annuity payments), it would commonly be called a life annuity, but also known as a life-contingent annuity or simply lifetime annuity. If the annuity is paid over a fixed period it is known as an "annuity with period certain". The payments can also be paid over the lifetime of the annuitant(s) or for a fixed period, whichever is longer. This is known as "life with period certain".

A hybrid of these is when the payments stop at death, but also after a predetermined number of payments, if this is earlier: known as a temporary life annuity. The difference with the period certain annuity is that the period certain annuity will keep paying after the death of the annuitant until the period is completed.

Life annuities
A life or lifetime immediate annuity is most often used to provide an income in old age, i.e. a pension. This type of annuity may be purchased from an insurance company.

This annuity works somewhat like a loan that is made by the purchaser to the issuing company, who then pay back the original capital with interest to the annuitant on whose life the annuity is based. The assumed period of the loan is based on the life expectancy of the annuitant. In order to guarantee that the income continues for life, the investment relies on cross-subsidy. Because an annuity population can be expected to have a distribution of lifespans around the population's mean(average) age, those dying earlier will support those living longer.

Cross-Subsidy remains one of the most effective ways of spreading a given amount of capital and investment return over a life time without the risk of funds running out.

Life annuity variants
At a cost to the payments, an annuity can be purchased with addition of another life such as a spouse on whose life the annuity is wholly or partly guaranteed. For example, it is common to buy an annuity which will continue to pay out to the spouse of the annuitant after his death, for as long as the spouse survives. The annuity paid to the spouse is called a reversionary annuity.

Other features such as a minimum guaranteed payment period irrespective of death, known as period certain, or escalation where the payment rises by inflation or a fixed rate annually can also be purchased.

Life with period certain annuities are more palatable to people who have accumulated money and would not like to lose all of it if they were to die soon after annuitization. At least the period certain payments will be made to their beneficiary.

Impaired life annuities for smokers or those with a particular illness are also available from some insurance companies. Since the life expectancy is reduced, the payment for the purchaser is raised.

Deferred Annuties
In the case of a deferred annuity there are two phases of the annuity. The accumulation phase is the time between initial purchase and annuitization. When the annuity is turned into a stream of payments, academically it is known as the annuitization phase. Before annuitization, aditional purchase payments, known as premiums may be made. In a deferred annuity, the goal is to invest the premium payments in either guaranteed accounts or variable accounts and earn investment returns. These returns can then be withdrawn when desired based on the features of the contract.

A wide variety of features have been developed by annuity companies in order to make their products more attractive. These include death benefit options and living benefit options.

Investment Considerations
Because immediate annuities generally give a series of guaranteed payments, they are priced consistently with other guaranteed investments, such as government bonds. These are less risky than other investments, such as the stock market, and offer a lower expected return. Sometimes annuities are based on investments expected to give a better return, and the risk of these may vary from funds that incorporate some form of protection (for example by purchasing derivatives) through to pure equity funds based on shares alone. At the riskiest end of the market where the fund is not held in trust, the annuity provider risks going bankrupt and possibly defaulting on the policy, as happened in Japan in the 1990s.

Actuarial Considerations
A collection of algebraic shortcuts known as annuity functions are used to model annuities, as well as a variety of other financial arrangements.

In the USA tax code, the growth of the premium during the accumulation phase is not subject to current income tax. This is referred to as being tax deferred. Perhaps the tax deferred status of deferred annuities has led to their common usage in the United States. Under the US tax code, the benefits from annuity contracts do not always have to be taken in the form of a fixed stream of payments (annuitization), and many of the contracts are bought primarily for the tax benefits rather than to get a fixed stream of income.

In the United Kingdom, the income from Compulsory Purchase Annuties purchased with pension funds or by an employer immediately on retirement (a 'Hancock annuity) is treated as taxable income. The income from Purchased Life Annuities, bought by any other means, has an element which is considered return of capital, and only the excess over this is considered a gain that is subject to income tax. The element considered capital return is based on life expectancy and will therefore increase with age.

Government Incentives
Because of cross-subsidy and the guarantees an annuity can give against running out of income and becoming dependent on state welfare in old age, annuities often have a favourable tax treatment, which may affect how attractive they are relative to other investments.

Immediate annuities are a compulsory feature of certain pension saving schemes in some countries, where the government grants tax deductions, provided that savings are paid into a fund which can only (or mainly) be withdrawn as an annuity. The United Kingdom and the Netherlands have such schemes. From 2003 the tax deduction in the Netherlands is only allowed if, without additional savings, the old age income would be less than 70% of the current income.

In the UK contributions into pension savings are generally free of income tax, up to certain limits. Although a number of different regimes exist, personal pension funds taken out since 1988 must use at least 75% of the fund to purchase an annuity by the 75th birthday of the annuitant. If an annuity is not immediately purchased retirement income up until this age can be drawn from the fund by using Pension Income Withdrawal formerly (and still frequently called) Income Drawdown. This operates under a strict code of rules and limits according to age and figures said by the Government Actuarial Department to prevent the fund being eroded too fast. Individuals may vary withdrawals between 35% and 100% of a maximum limit, that is reset every three years - known as the triennial review. Income Drawdown carries both the investment risk of the invested pension fund and mortality drag that occurs from the loss of cross subsidy and advancing average age expectancy that occurs in the time over which annuity purchase is delayed.

Wednesday, March 09, 2005

Life Insurance

Life insurance policies, including pensions and life annuity policies, provide payments depending on the life or the death of a particular person or persons.

Life insurance policies are issued in two basic types: term life and permanent life.

Term life insurance, in a level term form, requires fixed, regular premiums and pays the death benefit, also called the principle sum, only if the insured dies during the policy's term. There are no cash values built under these policies.

Whole life insurance also requires fixed, regular premiums and pays the death benefit when the insured dies. Because the level premium in the early years of such a policy exceeds the average cost of claims and expenses there are moneys available to be invested. The policy owner has access to these invested amounts via the policy's surrender value. Surrender values are not usually available in the first few years of the policy because of high initial expenses. In this sense a whole-life policy has an investment component. Therefore, whole-life insurance is more expensive than term life.

Documents that may be required for payment on life insurance include a certified, official copy of the death certificate stating that a person died on a particular date. A claim form from the insurance company would also usually be required to be signed by each beneficiary or their representative.

Annuity policies are issued by insurance companies in two ways: deferred and immediate. A deferred annuity, as the name implies, includes a period of premium payment before the normal payments to the beneficiary (usually monthly) commence. If the beneficiary dies during this period, then the accumulated premiums (with or without interest) are paid as a benefit. An immediate annuity requires a single (lump-sum) payment and payments to the beneficiary start immediately.

Under both types of annuity it is possible to include guaranteed periods for payments e.g. 5 or 10 years. Both the commencement of benefit payments and the effect of the death of the annuitant (the beneficiary after payments start) may depend on the survival of another life (lives) or the death of another life (lives). Such annuities are called contingent annuities and are common under pension plans and estate settlements e.g. when the pensioner dies his benefit will continue at 60% of its level to a surviving spouse.

Health Insurance

Health Insurance is a type of insurance whereby the insurer pays the medical costs of the insured if the insured becomes sick due to covered causes, or due to accidents. The insurer may be a private organization or a government agency. Market based health care systems such as that used in the United States rely on private medical insurance.

Private health insurance

Health insurance is one of the most controversial forms of insurance because of the conflict between the need for the insurance company to remain solvent versus the need of its customers to remain healthy, which many view as a basic human right. This conflict exists in a liberal healthcare system because of the unpredictability of how patients respond to medical treatment. Suppose a large number of customers of a particular insurance company were to contract a rare disease costing 10 million dollars to fight for each patient. The insurance company would be faced with the choice of either charging all its future customers astronomical contributions (thus losing customers and going out of business), paying all claims without complaint (thus going out of business) or fighting the customers in an attempt to deny the costly treatment (thus outraging patients and their families, and becoming a target for lawsuits and legislation).

There are further economic problems with private health insurance. Asymmetry of information about a persons health and behaviour is likely to lead to adverse selection and moral hazard. In essence, those seeking health insurance are likely to be those with existing medical problems or high likelihood of future medical problems and those who take out insurance may engage in risky behaviour, such as smoking and excessive alcohol consumption, which they otherwise would not. These problems may lead to 'good' insurance risks being priced out of the market or even insurance being uneconomical to provide. With publicly funded health insurance the good and the bad risks are all included in the coverage and the same moral hazard applies. Further, every risk must subsidize the unhealthy, and those that take care of their health have no opportunity to avoid this subsidization.

Publicly funded medicine

Many countries have made the societal choice to avoid this important conflict by nationalizing the health industry so that doctors, nurses, and other medical workers become state employees, all funded by taxes; or setting up a national health insurance plan that all citizens pay into with tax or quasi-tax payments, and which pays private doctors for health care. These national health care systems also have their problems.

Some of these countries have citizen groups which protest bureaucracy and cost-cutting measures that unduly delay medical treatment. Similar issues exist with private health management insurances (HMO) in countries with privately funded medicine.


In the United States, health insurance is made more complicated by Federal Medicare/Medicaid programs, which have had the unintended consequence of determining the price of medical procedures. Many suspect that these prices are set independently of medical necessity or actual cost. A physician who refuses to accept a Medicare/Medicaid payment will be banned from accepting any such payments for a number of years, regardless of the reason for rejecting the payment or the amount offered. In either case, this means that private insurers have little incentive to pay more than the government does.

History and evolution

Today, most comprehensive private health insurance programs cover the cost of routine, preventative, and emergency health care procedures, and also most prescription drugs, but this was not always the case.

Back in the late 19th century, early health insurance was actually disability insurance, in the sense that it covered only the cost of emergency care for catastrophic injuries that could (and often did) lead to a disability. This artifact of history persisted right up to the start of the 21st century in some jurisdictions (like California), where all laws regulating health insurance actually referred to disability insurance. Patients were expected to pay all other health care costs out of their own pockets, under what is known as the fee-for-service business model.

As the Industrial Revolution matured during the middle-to-late 20th century, traditional disability insurance evolved into modern health insurance as both employers and governments recognized the value of encouraging patients to seek regular checkups and preventative care from primary care physicians. It is usually much cheaper to treat diseases like cancer if they are diagnosed early.

Common complaints of private insurance

Some common complaints about private health insurance include:

  • Insurance companies do not announce their health insurance premiums more than a year in advance. This means that, if one becomes ill, he may find that his premiums have greatly increased. This largely defeats the purpose of having insurance in the eyes of many.
  • If insurance companies try to charge different people different amounts based on their own personal health, people will feel they are unfairly treated. Some states require that insurance companies cover all who apply at the same cost, or that rates vary only by age of the insured; this rule has the effect (called adverse selection) that healthy people subsidize sick ones, and thus frequently only those in poor health buy insurance, making the premiums very expensive.
  • When a claim is made, particularly for a sizeable amount, it may be deemed in the best interest of the insurance company to use paperwork and bureaucracy to attempt to avoid payment of the claim or, at a minimum, greatly delay it. Some percentage of insureds will simply give up, leading to lower costs for the insurance company.
  • Health insurance is often only widely available at a reasonable cost through an employer-sponsored group plan. This means that unemployed individuals and self-employed individuals are at a disadvantage.
  • Employers can write some or all of their employee health insurance premiums off of their taxable income whereas traditionally individuals have had to pay taxes on income used to fund health insurance. This reduces the employee's bargaining power in negotiating service with the insurance provider and also increases their dependence on the employer. In the U.S., COBRA and more recent legislation has been passed in an attempt to address the latter concern, and full tax deductibility for health insurance premiums paid by the self-employed has recently been passed by Congress as well.
  • Experimental treatments are generally not covered. This practice is especially criticized by those who have already tried, and not benefited from, all "standard" medical treatments for their condition. It also leads to many insurers claiming or attempting to claim that proceedures are still "experimental" well after they have become standard medical practice in many instances. (This phenomenon was especially seen after organ transplants, particularly kidney transplants, first became standard medical practice, due to the tremendous costs associated with this proceedure and other organ transplantation.)
  • The Health maintenance organization ("HMO") type of health insurance plan has been criticized for excessive cost-cutting policies. The least justifiable of these efforts, according to critics, is having accountants or other administrators essentially making medical decisions for customers by deciding which types of medical treatment will be covered and which will not.
  • As the health care recipient is not directly involved in payment of health care services and products, they are less likely to scrutinize or negotiate the costs of the health care received. To care providers, insured care recipients are essentially seen as customers with relatively limitless financial resources who don't look at prices. The health care company has few popular and many unpopular ways of controlling this market force. In response to this, many insurers have implemented a program of bill review in which insureds are allowed to challenge items on a bill (particularly an in-patient hospital bill) as being for goods or services not received; if this is proven to be the case, the insured is awarded with a percentage of the amount that the insurer would have otherwise paid for this disputed item or items, usually 25% or occasionally even 50%, with a ceiling so that the insured will not truly become wealthy from this procedure.
Common complaints of publicly funded medicine
  • Price no longer influences the allocation of resources, thus removing a natural self-corrective mechanism for avoiding waste and inefficiency.
  • Health care workers' pay is often not related to quality or speed of care. Thus very long waits can be had before care is received.
  • Because publicly funded medicine is a form of socialism, many of the general concerns about socialism can be applied to this discussion.
Future Challenges

With the advent of DNA testing, previously unknown risk factors involving ones genetic makeup will become known and this is expected to lead to greater pressure on the private health insurance industry as they try to limit their exposure to high-risk individuals. As larger groups of these individuals are identified and charged higher premiums (if they can get coverage at all) the pressure on privacy laws to limit the flow of personal medical data will only increase.

Title Insurance

A policy of title insurance is a contract of indemnity between the insurance company and the owner of an interest in real property. In plain English, this means that in the event that the insured owner of an interest in the insured property suffers an actual or threatened monetary loss, due to a title defect or lien created prior to the effective date of the policy that is not excluded as an exception to the policy, the title insurer will defend the insured against a lawsuit attacking the title or reimburse the insured for the actual monetary loss incurred, up to the dollar amount of insurance provided by the policy. Typically the real property interests insured are fee simple ownership or a mortgage. However, title insurance can be purchased to insure any interest in real property, including an easement, lease or life estate.

Title insurance differs in several respects from other types of insurance. Where most insurance is the contractual "coverage" where one party indemnifies or guarantees another party against a possible specific type of loss (such as an accident or death) at a future date, title insurance attempts to detect, prevent, and eliminate risks and losses caused by title problems which have their source in past events. Title companies attempt to achieve this by searching public records to develop and document the chain of title and to detect whether there are any adverse claims on the subject property. Any issues found are either fixed before issuing the title policy or the coverage is specifically written to exclude those items. Title insurers typically pay a very low percentage of their premium revenue out in claims in a given year: industry averages are 5 to 10%.

Just as lenders require hazard (fire) insurance and other types of insurance coverage to protect their investment, most first lien lenders will also require title insurance as security for their investment in real estate. Junior mortgage lenders may depending on the amount of the loan choose to rely on a title search which typically provides less legal assurances to the lender than the full title insurance policy.

There are two basic kinds of title insurance:

Owner's policy - The owner's policy insures a purchaser that the title to the property is free from defects or encumbrances, except those which are listed as exceptions in the policy. It covers losses and damages suffered if the title is unmarketable (i.e., if the title can not be legally sold and conveyed to another party), if the property is found to belong to someone else, if there is no access to the land, or if there is some other defect or lien on the title. An owner's policy will specifically list what interest in the property is insured as of what effective date. The policy will also contain various standard exclusions to coverage and also specific exceptions to title that the title company is unwilling to insure. The amount of the Owner's policy is typically the purchase price. The premium for the policy may be paid by the seller or buyer as the parties agree; usually there is a custom in a particular state which is reflected in most real estate contracts. Consumers should be wary of real estate contracts which provide that they pay for title charges without having knowledge of what those charges are. A real estate attorney, broker or loan officer should provide detailed information to the consumer as to this "title" pricing issue before the real estate contract is signed. Title insurance coverage lasts as long as the insured retains an interest in the land insured and typically no additional premium is paid after the policy is issued.

Lender's policy - In addition to the coverages provided on the owner's policy, this type of policy also insures the validity and enforceability of the lien of the lender's mortgage or deed of trust. The lender's policy protects the lender for the amount of money lent against the property. As the loan is paid down, the amount of coverage decreases, and once the loan is paid off, coverage under the policy terminates. The insurer's risk, therefore, under a loan policy is less than that of am owner's policy; as a result, insurers will charge lower premiums for a loan policy than would be charged for the same dollar amount of coverage on an owner's policy.

American Land Title Association ALTA is a national trade association of title insurers, ALTA promulgates standard forms of title insurance policy jackets for Owner's, Loan and Construction Loan policy forms. ALTA forms are used in most, but not all, states in the USA. ALTA also promulgates special endorsement forms for the various policies, endorsements amend and typically broaden the coverage given under a basic title insurance policy. Some states such as Texas and New York may require the use of their own forms of title insurance policy jackets and endorsements for properties located in those jursidictions. Title insurance pricing is regulated or fixed by state government in some states including Texas and Florida. Other states do not regulate title insurance premiums but instead rely on the marketplace to do so. Surprisingly, lower title premiums are generally found in the unregulated states.

Nonetheless, a wise consumer should shop for title insurance pricing and explore the issue of title insurance and closing costs with their attorney, real estate broker or lender in addition to the title insurance companies.


In the most general sense, a liability is anything that is a hinderance, or puts one at a disadvantage.

In accounting
In accounting, a financial liability is something that is owed to another party. This is typically contrasted with an asset which is something of value that you own. The basic accounting equation relates assets, liability, and capital (or equity) thus: liabilities + equity = assets where assets are what you own, liabilities are what you owe to others, and equity is what you have contributed to the venture.

Examples of types of liabilities include: money owing on a loan, money owing on a mortgage, or an IOU.
In Investing, what you owe. "Assets put cash in your pocket, liabilities take cash out of your pocket."

In law
In law a legal liability is a term used to describe situations in which a person is liable, for, say, damage to property and is therefore responsible to pay compensation for any damage incurred; liability may be civil or criminal.
In commercial law, limited liability is a form of business ownership in which business owners are legally responsible for no more than the amount that they have contributed to a venture. If for example, a business goes bankrupt an owner with limited liability will not lose unrelated assets such as a personal residence (assuming they do not give personal guarantees). For an explanation see business entity.

An example (from both accounting and law)
Money that you have accumulated is an asset to you. It is something of value that you own. If you take your money to a bank and deposit it there, it becomes a liability to the bank (the bank owes you the money). The money is both an asset to you and a liability to the bank.

Alternatively if, when you take the money to the bank, you store it in a safety deposit box rather than deposit it into an account, the bank has a legal liability (under bailment law) to ensure that your asset is not damaged while it is under their care.

Surety Bonds

A surety bond is a contract between at least three parties: (i) the principal, (ii) the obligee, and (iii) the surety. Through this agreement, the surety agrees to make the obligee whole (usually by payment of money) if the principal defaults in its performance of its promise to the obligee. The contract is formed so as to induce the obligee to contract with the principal, i.e., to demonstrate the credibility of the principal.

Suretyship bonds originated hundreds of years ago as a mechanism through which trade over long distance could be encouraged. They are frequently used in the construction industry: in order to obtain a contract to build the project, the general contractor (and often the sub-contractors as well) must provide the owner a bond for its performance of the terms of the contract. Conversely, owners and contractors may also provide payment bonds to ensure that subcontractors and supppliers are paid for work done. Under the Miller Act, payment and performance bonds are required for general contractors on all U.S. federal government construction projects where the contract price exceeds $100,000.00.

Surety bonds are also used in other situations, for example, to secure the proper performance of fiduciary duties by persons in positions of private or public trust.

A key term in nearly every surety bond is the penal sum. This is a specified amount of money which is the maximum amount that the surety will be required to pay in the event of the principal's default. This allows the surety to assess the risk involved in giving the bond; the premium charged is determined accordingly.

If the principal defaults and the surety turns out to be insolvent, the purpose of the bond is rendered nugatory. Thus, the surety on a bond is usually an insurance company whose solvency is verified by private audit, governmental regulation, or both.

A bail bond is a type of surety bond used to secure the release from custody of a person charged with a criminal offense. Under such a contract, the principal is the accused, the obligee is the government, and the surety is the bail bondsman.

In 2001, a new type of suretyship bond called a Sure-T bond was announced. Protecting Internet auction (e.g., eBay) users in the case of default by a bidder or seller, the Sure-T bond further extends the reach of suretyship bonds in encouraging long-distance trade.

Terrorism Insurance

Terrorism insurance is insurance purchased by property owners to cover their potential losses and liabilities that might occur due to terrorist activities. It is considered to be difficult for insurance companies, as the odds of terrorist attacks are very difficult to estimate and the costs high, making the setting of premiums a difficult matter.


Insurance payments related to terrorism are restricted to a billion euro per year for all insurance companies together. This regards property insurance, but also life insurance, medical insurance, etc.


On November 26, 2002 US President George W. Bush signs into law the Terrorism Risk Insurance Act which creates a federal backstop for insurance claims related to acts of terrorism.

Political Risk Insurance

Political risk insurance can be taken out by businesses, of any size, having operations in countries in which there is a risk that revolution or other political conditions will result in a loss.

Political risk insurance is available for several different types of political risk, including (among others):
  • Political violence, such as revolution, insurrection, civil unrest, terrorism or war
  • Governmental expropriation or confiscation of assets
  • Governmental frustration or repudiation of contracts
  • Wrongful calling of letters of credit or similar on-demand guaranties
  • Inconvertibility of foreign currency or the inability to repatriate funds.

As with any insurance, the precise scope of coverage is governed by the terms of the insurance policy.

While political risk insurance policies are sometimes manuscripted for specific situations, the major political risk insurers have standard forms for the coverages that they issue.

Property Insurance

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 or boiler insurance.

Auto Insurance

Auto insurance is insurance consumers can purchase for cars, trucks, and other vehicles. Its primary use is to provide protection against losses incurred as a result of car accidents.

Coverage Levels

By buying auto insurance, depending on the type of coverage purchased, the consumer may be protected against:

  • The cost of repairing the vehicle following an accident
  • The cost of purchasing a new vehicle if it is stolen or damaged beyond economic repair
  • Legal liability claims against the driver or owner of the vehicle following the vehicle causing damage or injury to a third party.

Liability insurance covers only the last point, while comprehensive insurance covers all three. Even comprehensive insurance, however, doesn't fully cover the risk associated with buying a new car. Due to the sharp decline in value immediately following purchase, there is generally a period in which the remaining car payments exceed the compensation the insurer will pay for a "totaled" (destroyed, or written-off) vehicle. In some countries including New Zealand and Australia market structures mean that people are more likely to buy a nearly new car than a new car so this is less of a problem.

Public Policy

In many countries it is compulsory to purchase auto insurance before driving on public roads. This is to protect third parties against the financial consequences of loss, damage or injury caused by a vehicle. Typically, coverage against loss of or damage to the driver's own vehicle is optional - one notable exception to this is in Saskatchewan, where SGI provides collision coverage (less a $700 deductible) as part of its basic insurance policy. In South Australia Third Party Personal insurance from the State Government Insurance Corporation (SGIC) is included in the license registration fee. Most countries relate insurance to both the car and thee driver, however the degree of each varies greatly.

Pricing Plans

Except for government-mandated liability insurance, most car insurance plans charge a premium based on several risk factors that are likely to have an impact on the frequency of occurence or on the expected cost of future claims. The premium usually depends on the car characteristics, the coverage selected (deductible, limit, covered perils), the usage of the car (commute to work or not, annual distance driven), and the profile and driving history of the drivers (age, sex, marital status, traffic violations and accidents).

For mandatory liability insurance, in some countries risk factors are taken into account (giving varying prices) and in others a fixed rate is charged regardless of the individual circumstances.

Distance risk factor

Flat rate
Several car insurance plans charge a flat rate regardless of how much the car is used.

Reasonable estimation
Several car insurance plans relies on a reasonable estimation of the average annual distance expected to be driven which is provided by the insured. This benefits drivers who drive their cars infrequently.

Odometer-based systems
Cents Per Mile Now ( advocates a car insurance pricing scheme based on odometer readings. The policyholder would purchase insurance to cover a certain number of miles driven. The beginning and ending odometer readings would then be printed on the insurance card, so that in the event of a traffic stop, an officer could easily verify that the insurance is current.
Critics point out the possibility of cheating the system by odometer tampering. Although the newer electronic odometers are difficult to roll back, they can still be defeated by disconnecting the odometer wires and reconnecting them later.

GPS-based system
In 1998, Progressive Insurance started a pilot program in Texas in which volunteers installed a GPS-based technology called Autograph in exchange for a discount. The device tracked their driving behavior and reported the results via cellular phone to the company. Policyholders were reportedly more upset about having to pay for the expensive device than they were over privacy concerns.

OBDII-based system
In 2004, the company launched another pilot program to allow policyholders to earn a discount on their premiums by consenting to use its TripSense device. TripSense connects to a car's OnBoard Diagnostic(OBDII) port, which exists in all cars built after 1996. The discount is forfeited if the device is disconnected for a significant amount of time.
According to Progressive, the TripSense device records:

  • Start time
  • End time
  • Miles driven
  • Duration
  • Number of aggressive braking events
  • Number of aggressive acceleration events
  • Speed at 10-second intervals
  • Time and date of each connection/disconnection to the OBDII port

Criticisms of the Insurance Industry

Insurance insulates too much
By creating a "security blanket" for its insureds, an insurance company may inadvertently find that its insureds may not be as risk-averse as they should be (since the insured assumes the risk belongs to the insurer). To reduce their own financial exposure, insurance companies have contractual clauses that mitigate their obligation to provide coverage if the insured engages in some kind of behavior that grossly magnifies their risk of loss or liability.

For example, liability insurance providers do not provide coverage for liability arising from intentional torts committed by the insured. Even if a provider was irrational enough to try to provide such coverage, it is against the public policy of most countries to allow such insurance to exist, and thus it is usually illegal.

Lack of knowledge of policyholders
Insurance policies can be complex and some policyholders may not understand all the fees, regulation and coverages included in a policy. As a result, people could buy policies at unfavorable terms. In response to these issues, governments often make detailed regulations that set down minimum standards for policies and govern how they may be advertised and sold.

Many individuals purchase policies through an insurance broker. The broker can councel the policyholder on which coverage to purchase and limitations of the policy. A broker generally holds contracts with many insurers which allows the broker to "shop" the market for the best rates and coverage possible.

Redlining was originally denial of insurance to any area because of the area.

Risk determines premium. Evaluation of risk by the insurer considers every available, quantifiable factor, including location, credit scores, gender, occupation, marital status, and education level. However, some people consider all or some of these factors to be "unfair" and hurl unproven claims such as racist. So, for political reasons, governments may limit the factors that may be used.

An interesting refutation to this is that the job of an insurance underwriter is to properly categorize a given risk as to the likelihood that the loss will occur. Any factor that causes a greater likelihood of loss should in theory, be charged a higher rate. This is a basic principle of insurance and must be followed for insurance companies or groups to operate properly, even for non-profit groups. Thus, discrimination of potential insureds by legitimate factors is central to insurance. Therefore the only thing that can be considered legitimately "unfair" are practices that discriminate against a given group without actual factors that show that the group is a higher risk. So, eliminating real factors discriminates against other insureds by forcing them to bear part of the cost of the disallowed perceived factors.

Life Insurance and Saving

Certain life insurance contracts accumulate cash values, which may be taken by the insured if the policy is surrendered or which may be borrowed against. Some policies, such as annutities and endowment policies, are financial instruments to accumulate or liquidate wealth when it is needed. See life insurance.

In many countries, such as the US and the UK, tax law provides that the interest on this cash value is not taxable under certain circumstances. This leads to widespread use of life insurance as a tax-efficient method of saving as well as protection in the event of early death.

Types of Insurance Companies

Insurance companies may be classified as:

Life insurance companies, who sell life insurance, annuities and pensions products. Non-life or general insurance companies, who sell other types of insurance. In most countries, life and non-life insurers are subject to different regulations, tax and accounting rules. The main reason for the distinction between the two types of company is that life business is very long term in nature - coverage for life assurance or a pension can cover risks over many decades. By contrast, non-life insurance cover usually covers shorter periods, such as one year.

Insurance companies are also often classified as either mutual or stock companies. This is more of a traditional distinction as true mutual companies are becoming rare. Mutual companies are owned by the policyholders, while stockholders, (who may or may not own policies) own stock insurance companies.

Reinsurance companies are insurance companies that sell policies to other insurance companies, allowing them to reduce their risks, and protects them from very large losses. The reinsurance market is dominated by a few very large companies, with huge reserves.

There are also companies which are known as Insurance Brokers. Like a mortgage broker, these companies are paid a fee by the customer to shop around for the best insurance policy amongst many companies.