Contents

About ICICIPru
Meaning of Insurance
History of insurance
Principles of insurance
Indemnification
Insurers' business model
History of insurance
Types of insurance
oAuto insurance
oHome insurance
oHealth insurance
oDisability insurance
oCasualty insurance
oLife insurance
oProperty insurance
oLiabili ty insurance
oCredit insurance
oOther types
oInsurance financing vehicles
oClosed comm unity self-insurance
• Insurance companies
• Global insurance industry
• Controversies
oInsurance insulates too much
oComplexity of insurance policy contracts
oRedlining
oInsurance patents
oThe insurance industry and rent seeking
oCriticism of insurance companies
About ICICI PRU Life

Overview

The ICICI Prudential Edge

The ICICI Prudential edge comes from our commitment to our
customers, in all that we do - be it product development, distribution, the
sales process or servicing. Here's a peek into what makes us leaders.

1. Our products have been developed after a clear and thorough

understanding of customers' needs. It is this research that helps us
develop Education plans that offer the ideal way to truly guarantee your
child's education, Retirement solutions that are a hedge against inflation
and yet promise a fixed income after you retire, or Health insurance that
arms you with the funds you might need to recover from a
dreaded
 disease.

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

3. Robust risk management and underwriting practices form the core of

our business. With clear guidelines in place, we ensure equitable costing
of risks, and thereby ensure a smooth and hassle-free claims process.

4. Entrusted with helping our customers meet their long-term goals, we

adopt an investment philosophy that aims to achieve risk adjusted
returns over the long-term.

5. Last but definitely not the least, our 28,000 plus strong team is given
the opportunity to learn and grow, every day in a multitude of ways. We
believe this keeps them engaged and enthusiastic, so that they can
deliver on our promise to cover you, at every step in life.

Vision & Values

Our vision:

To be the dominant Life, Health and Pensions player built on trust by

world-class people and service.

This we hope to achieve by:

• Understanding the needs of customers and offering them superior
products and service
 • Leveraging technology to service customers quickly, efficiently and
conveniently
• Developing and implementing superior risk management and
investment strategies to offer sustainable and stable returns to
our policyholders
• Providing an enabling environment to foster growth and learning for
our employees
• And above all, building transparency in all our dealings

The success of the company will be founded in its unflinching

commitment to 5 core values -- Integrity, Customer First,
Boundaryless, Ownership and Passion. Each of the values describe
what the company stands for, the qualities of our people and the way we
work.

We do believe that we are on the threshold of an exciting new opportunity,

where we can play a significant role in redefining and reshaping the sector.
Given the quality of our parentage and the commitment of our team, there
are no limits to our growth.

Our values :

Every member of the ICICI Prudential team is committed to 5 core values:

Integrity, Customer First, Boundaryless, Ownership, and Passion.
These values shine forth in all we do, and have become the
keystones of our success.
 Promoters
ICICI Bank

ICICI Bank Limited (NYSE:IBN) is India's largest private sector bank

and the second largest bank in the country, with consolidated total assets
of $121 billion as of March 31, 2008. ICICI Bank’s subsidiaries
include India’s leading private sector insurance companies and among
its largest securities brokerage firms, mutual funds and private equity
firms. ICICI Bank’s presence currently spans 19 countries, including
India.

Prudential Plc

Established in London in 1848, Prudential plc, through its businesses in

the UK, Europe, US, Asia and the Middle East, provides retail
financial services productsand services to more than 20
million customers, policyholder and unit holders and
manages over £267 billion of funds worldwide (as of December 31,
2007). In Asia, Prudential is the leading European life insurance
company with life operations in China, Hong Kong, India,
Indonesia, Japan, Korea, Malaysia, the Philippines,
Singapore, Taiwan, Thailand, and Vietnam. Prudential is one of the largest
retail fund managers for Asian sourced assets ex-Japan. Its fund
management business has expanded into ten markets, comprising of China,
Hong Kong, India, Japan, Korea, Malaysia, Singapore, Taiwan,
Vietnam and United Arab Emirates.
 Fact Sheet
The Company
ICICI Prudential Life Insurance Company is a joint venture between ICICI
Bank, a premier financial powerhouse, and Prudential plc, a leading
international financial services group headquartered in the United
Kingdom. ICICI Prudential was amongst the first private sector insurance
companies to begin operations in December 2000 after receiving approval
from Insurance Regulatory Development Authority (IRDA).

ICICI Prudential Life's capital stands at Rs. 42.72 billion (as of June 30,
2008) with ICICI Bank and Prudential plc holding 74% and 26%
stake respectively. For the quarter ended June 30, 2008, the company
garnered Retail Weighted New Business Premium of Rs. 1,174 crores as
against Rs
810 crores for the quarter ended June 30, 2007, thereby posting a growth
of 45% and has underwritten over 6 lakh policies over this period. The
company has assets held over Rs. 30,600 crore as on August 31, 2008.

ICICI Prudential Life is also the only private life insurer in India to receive
a National Insurer Financial Strength rating of AAA (Ind) from Fitch
ratings. The AAA (Ind) rating is the highest rating, and is a clear assurance
of ICICI Prudential's ability to meet its obligations to customers at the time
of maturity or claims.

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

ICICI Prudential Life has one of the largest distribution networks amongst
private life insurers in India. It has a strong presence across India with over
2000 branches (includung 1,095 micro-offices) and an advisor base of over
261,000 (as on August 31, 2008).

The company has 24 bancassurance partners having tie-ups with

ICICI Bank, Bank of India, South Indian Bank, Shamrao Vitthal Co-
Op Bank, Jalgaon Peoples Co-op Bank, Ernakulam District Co-op
Bank, Idukki District Co-op Bank, Ratnagiri Sindhudurg Gramin Bank,
Solapur Gramin Bank, Wainganga Kshetriya Gramin Bank,
Aryawart Gramin Bank, Jharkhand Gramin Bank,Narmada
Malwa Gramin Bank, Baitarani Gramya Bank, Ratnagiri District
Central Co-op Bank, Seva Vikas Co-op Bank, Sangli Urban Co-
Operative Bank, Baramati Co-operative Bank, Ballia Kshetriya Co-
Operative Bank, The Haryana State Co-Operative Bank,Renuka
Nagrik Sahakari Bank, Amanath Co-Operative Bank,
Arvind Sahakari Bank, Bhandara Urban Co Operative Bank

Products

Insurance Solutions for Individuals

ICICI Prudential Life Insurance offers a range of innovative,

customer- centric products that meet the needs of customers at every
life stage. Its products can be enhanced with up to 4 riders, to create
a customized solution for each policyholder.
Savings & Wealth Creation Solutions
• Save'n'Protect is a traditional endowment savings plan that offers
life protection along with adequate returns.
• CashBak is an anticipated endowment policy ideal for meeting
milestone expenses like a child's marriage, expenses for a
child's higher education or purchase of an asset. It is available for
terms of
15 and 20 years.
• LifeTime Gold is a unit-linked plan that offers customers the
flexibility and control to customize the policy to meet the changing
needs at different life stages. It offers 7 fund options -
Preserver, Protector, Balancer, Flexi Balanced Multiplier, R.I.C.H
and Flexi Growth.
• LifeStage RP is unit linked plan that provides you with an option of
lifecycle-based portfolio strategy that continuously re-distributes
your money across various asset classes based on your life
stage. This will help you achieve the right Asset Allocation to
meet your desired financial goals.
• LifeLink Super is a single premium unit linked insurance plan
which combines life insurance cover with the opportunity to
stay invested in the stock market.
• Premier Life Gold is a limited premium paying plan specially
structured for long-term wealth creation.
• InvestShield Life New is a unit linked plan that provides premium
 guarantee on the invested premiums and ensures that the
customer receives only the benefits of fund appreciation without
any of the risks of depreciation.
• InvestShield Cashbak is a unit linked plan that provides
premium guarantee on the invested premiums along with flexible
liquidity options.
• LifeStage Assure a unit linked insurance plan that provide upto 450
% of first year premium guarantee on maturity, with the
additional advantage of a lifecycle based portfolio strategy that
allocates the investor’s money across various asset classes based on
his life stage and risk appetite.

Protection Solutions
• LifeGuard is a protection plan, which offers life cover at low cost. It
is available in 3 options - level term assurance, level term assurance
with return of premium & single premium.
• HomeAssure is a mortgage reducing term assurance plan
designed specifically to help customers cover their home loans in a
simple and cost-effective manner.
Education Solutions
• SmartKid New ULRP provides guaranteed educational benefits to a
child along with life insurance cover for the parent who purchases
the policy. The policy is designed to provide money at
important milestones in the child's life. SmartKid plans are also
available in traditional form.
Retirement Solutions
• ForeverLife is a traditional retirement product that offers guaranteed
returns for the first 4 years and then declares bonuses annually.
• LifeTime Super Pension is a regular premium unit linked pension
 plan that helps one accumulate over the long term and offers 5
annuity options (life annuity, life annuity with return of
purchase price, joint life last survivor annuity with return of
purchase price, life annuity guaranteed for 5, 10 and 15 years &
for life thereafter, joint life, last survivor annuity without return
of purchase price) at
the time of retirement.
• LifeStage Pension is a regular premium unit linked pension plan that
provides you with a unique lifecycle-based strategy that continuously
re-distributes your money across various asset classes based on your
life stage, eventually providing you with a customized
retirement solution.
• LifeLink Super Pension is a single premium unit linked pension
plan.
• Immediate Annuity is a single premium annuity product that
guarantees income for life at the time of retirement. It offers
the benefit of 5 payout options.
• PremierLife Pension is a unique and convenient retirement solution
with a limited premium paying term of three or five years, to
suit professionals and businessmen, especially those who require
more flexibility and customization while planning their finances.

Health Solutions
• Health Assure Plus: Health Assure is a regular premium plan which
provides long term cover against 6 critical illnesses by
providing policyholder with financial assistance, irrespective of
the actual medical expenses. Health Assure Plus offers the added
advantage of
an equivalent life insurance cover.
• Cancer Care: is a regular premium plan that pays cash benefit on
the diagnosis as well as at different stages in the treatment of various
cancer conditions.
 • Cancer Care Plus: is a wellness plan that includes all the benefits of
Cancer Care and also provides an additional benefit of free periodical
cancer screenings.
• Diabetes Care: Diabetes Care is a unique critical illness
product specially developed for individuals with Type 2 diabetes
and pre- diabetes. It makes payments on diagnosis on any of 6
diabetes related critical illnesses, and also offers a coordinated
care approach to managing the condition. Diabetes Care Plus also
offers life cover.
• Diabetes Care Plus: is a unique insurance policy that provides an
additional benefit of life cover for Type 2 diabetics and pre-diabetics
• Hospital Care: is a fixed benefit plan covering various stages
of treatment - hospitalisation, ICU,
procedures & recuperating allowance. It
covers a range of medical conditions (900 surgeries) and has a
long term guaranteed coverage upto 20 years.
• Crisis Cover : is a 360-degree product that will provide long-
term coverage against 35 critical illnesses, total and permanent
disability, and death.
• MediAssure is a health insurance policy that provides assured
insurability till age 75 years, assured coverage for accepted pre-
existing illnesses after 2 years and an assured price for 3 years.

• Group Insurance Solutions

ICICI Prudential Life also offers Group Insurance Solutions for
companies seeking to enhance benefits to their employees.

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

• Group Superannuation Plan: ICICI Prudential Life offers a flexible

market linked scheme that provides substantial benefits to both employers
and employees. Both defined contribution (DC) and defined benefit (DB)
schemes are offered to optimise returns for members of the trust and
rationalise cost. Members have the option of choosing from various
annuity options or opting for a partial commutation of the annuity at the
time of retirement.

• Group Immediate Annuities: ICICI Prudential Life realises the

importance of prudent retirement planning. With this in mind, we
have developed a suite of annuity products that not only give you an
income for
life but also provide you options to match your needs. In addition to the
annuities offered to existing superannuation customers, we offer
immediate annuities to superannuation funds not managed by us.

• Group Term Plan: ICICI Prudential Life's flexible group term solution
helps provide an affordable cover to members of a group. The cover could
be uniform or based on designation/rank or a multiple of salary. The
benefit under the policy is paid to the beneficiary nominated by the
member on his/her death.

Flexible Rider Options

ICICI Prudential Life offers flexible riders, which can be added to
the basic policy at a marginal cost, depending on the specific needs
of the customer.

1. Accident & disability benefit: If death occurs as the result of

an accident during the term of the policy, the beneficiary
receives an additional amount equal to the rider sum assured under
the policy. If
an accident results in total and permanent disability, 10% of rider
sum assured will be paid each year, from the end of the 1st year after
the disability date for the remainder of the base policy term or 10
years, whichever is lesser. If the death occurs while travelling in an
 authorized mass transport vehicle, the beneficiary will be entitled to
twice the sum assured as additional benefit.
2. Critical Illness Benefit: protects the insured against financial loss in
the event of 9 specified critical illnesses. Benefits are payable to the
insured for medical expenses prior to death.

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

an accident, the future premiums continue to be paid by the company
till the time of maturity. This rider is available with SmartKid,
LifeTime Plus, LifeTime Super and LifeTime Super Pension.
4. Income benefit rider: In case of death of the life assured during
the term of the policy, 10% of the sum assured is paid annually
to the nominee on each policy anniversary till the maturity of the
rider.

About the Promoters

ICICI Bank
ICICI Bank Limited (NYSE:IBN) is India's largest private sector bank and
the second largest bank in the country, with consolidated total assets of $1
1 2.6 billion as of June 30 , 2008. ICICI Bank’s subsidiaries
include India’s leading private sector insurance companies and among
its largest securities brokerage firms, mutual funds and private equity
firms. ICICI Bank’s presence currently spans 19 countries, including
India.
Established in London in 1848, Prudential plc, through its businesses in
the UK, Europe, US, Asia and the Middle East, provides retail
financial services products and services to more
than 21 million customers, policyholder and unit
holders and manages over £256 billion of funds worldwide
(as of June 30, 2008). In Asia, Prudential is the leading Europe- based life
insurer with life operations in China, Hong Kong, India,
Indonesia, Japan, Korea, Malaysia, the Philippines, Singapore,
Taiwan, Thailand, and Vietnam. Prudential is one of the largest asset
management companies in terms of overall assets sourced in Asia ex-
japan, with £34.3 billion funds under management (as of June 30,
2008) and operations in
ten markets including China, Hong Kong, India, Japan, Korea, Malaysia,
Singapore, Taiwan, Vietnam and United Arab Emirates.

Meaning Of Insurance
Meaning Of Insurance : facilitates reimbursement
during crisis situations,insurance means promise of
compensation for any potential future losses. There
are different insurance companies that offer wide range of
insurance options and an insurance purchaser can select as
per own convenience andpreference.
Several insurances provide comprehensive coverage
with affordable premiums. Premiums are periodical payment and
different insurers offer diverse premium
options.
The periodical insurance premiums are calculated according to
the total insurance amount. The main meaning of insurance are used as
effective tools of risk management. Quantified risks of different volumes
can be insured.
The aim of all insurance is to compensate the owner against loss
arising from a variety of risks, which he anticipates, to his life, property
and business. Insurance is mainly of two types: life insurance and
general insurance. General insurance means Fire, Marine and
Miscellaneous insurance which includes insurance against burglary or
theft, fidelity guarantee, insurance for employer's liability, and insurance
of motor vehicles, livestock and crops.
 The Insurance Act, 1972 and the General Insurance Business
(Nationalisation) Act, 1972 govern Fire and Marine Insurance, while the
Indian Marine Insurance At, 1963 governs marine insurance in our
country. These laws contain provisions relating to the constitution,
management and winding up of insurance companies and the conduct of
insurance business of all types. All insurance business in India has been
nationalised.
A Contract of insurance is a contract by which one party undertakes
to make good the loss of another, in consideration of a sum of money, on
the happening of a specified event, e.g. fire accident or death.

HISTORY OF INSURANCE
In some sense we can say that insurance appears simultaneously with the
appearance of human society. We know of two types of economies in
human societies: money economies (with markets, money, financial
instruments and so on) and non-money or natural economies (without
money, markets, financial instruments and so on). The second type is a
more ancient form than the first. In such an economy and community,
we can see insurance in the form of people helping each other. For
example, if a house burns down, the members of the community help
build a new one. Should the same thing happen to one's neighbour, the
other neighbours must help. Otherwise, neighbours will not receive help
in the future. This type of insurance has survived to the present day in
some countries where modern money economy with its financial
instruments is not widespread (for example countries in the territory of
the former Soviet Union).
Turning to insurance in the modern sense (i.e., insurance in a modern
money economy, in which insurance is part of the financial sphere),
early methods of transferring or distributing risk were practised by
Chinese and Babylonian traders as long ago as the 3rd and 2nd
mill ennia BC, respectively. Chinese merchants travelling treacherous
river rapids would redistribute their wares across many vessels to limit
the loss due to any single vessel's capsizing. The Babylonians developed
a system which was recorded in the famous Code of Hamm urabi, c.
 1750 BC, and practised by early Mediterr anean sailing merchants.
If a merchant received a loan to fund his shipment, he would pay the
lender an additional sum in exchange for the lender's guarantee to cancel
the loan should the shipment be stolen.
Achaemenian monarchs of Iran were the first to insure their people
and made it official by registering the insuring process in governmental
notary offices. The insurance tradition was performed each year in
Norouz (beginning of the Iranian New Year); the heads of different
ethnic groups as well as others willing to take part, presented gifts to the
monarch. The most important gift was presented during a special
ceremony. When a gift was worth more than 10,000 Derr ik
(Achaemenian gold coin) the issue was registered in a special office. This
was advantageous to those who presented such special gifts. For others,
the presents were fairly assessed by the confidants of the court.
Then the assessment was registered in special offices.
The purpose of registering was that whenever the person who presented
the gift registered by the court was in trouble, the monarch and the court
would help him. Jahez, a historian and writer, writes in one of his books
on ancient Iran: "[W]henever the owner of the present is in trouble or
wants to construct a building, set up a feast, have his children married,
etc. the one in charge of this in the court would check the registration. If
the registered amount exceeded 10,000 Derrik, he or she would receive
an amount of twice as much."
A thousand years later, the inhabitants of Rhodes invented the
concept of the 'general average'. Merchants whose goods were
being shipped together would pay a proportionally divided premium
which would be used to reimburse any merchant whose goods were
jettisoned during storm or sinkage.
The Gree ks and Romans introduced the origins of health and life
insurance c. 600 AD when they organized guilds called "benevolent
societies" which cared for the famili es and paid fun eral expenses of
members upon death. Guil ds in the Midd le 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.
Separate insurance contracts (i.e., insurance policies not bundled with
loans or other kinds of contracts) were invented in Genoa in the 14th
century, as were insurance pools backed by pledges of landed estates.
These new insurance contracts allowed insurance to be separated from
investment, a separation of roles that first proved useful in marine
insurance. Insurance became far more sophisticated in post-
Renaissance Europe, and specialized varieties developed.
Toward the end of the seventeenth century, London's growing
importance as a centre for trade increased demand for marine insurance.
In the late 1680s, Edward Lloyd opened a coffee house that became a
popular haunt of ship owners, merchants, and ships’ captains, and
thereby a reliable source of the latest shipping news. It became the
meeting place for parties wishing to insure cargoes and ships, and those
willing to underwrite such ventures. Today, Lloyd's of London
remains the leading market (note that it is not an insurance company) for
marine and other specialist types of insurance, but it works rather
differently than the more familiar kinds of insurance.
Insurance as we know it today can be traced to the Great Fire of
London, which in 1666 devoured 13,200 houses. In the aftermath of this
disaster, Nicholas Barbon opened an office to insure buildings.
In 1680, he established England's first fire insurance company, "The Fire
Office," to insure brick and frame homes.
The first insurance company in the United States underwrote fire
insurance and was formed in Charles Town (modern-day Charleston),
South Caroli na, in 1732. Benjamin Frankli n 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. In the United
States, regulation of the insurance industry is highly Balkanized,
with primary responsibility assumed by individual state insurance
departments. Whereas insurance markets have become centralized
nationally and internationally, state insurance commissioners operate
individually, though at times in concert through a national
insurance comm issioners' organization. In recent years, some
have called for a dual state and federal regulatory system (commonly
referred to as the Optional Federal Charter (OFC)) for insurance
similar to that which oversees state banks and national banks.

FUNDAMENTAL PRINCIPLES OF
INSURANCE
INDEMNITY
A contract of insurance contained in a fire, marine, burglary or any other
policy (excepting life assurance and personal accident and sickness
insurance) is a contract of indemnity. This means that the insured, in case
of loss against which the policy has been issued, shall be paid the actual
amount of loss not exceeding the amount of the policy, i.e. he shall be
fully indemnified. The object of every contract of insurance is to place
the insured in the same financial position, as nearly as possible, after the
loss, as if he loss had not taken place at all. It would be against public
policy to allow an insured to make a profit out of his loss or damage.
UTMOST GOOD FAITH
Since insurance shifts risk from one party to another, it is essential that
there must be utmost good faith and mutual confidence between the
insured and the insurer. In a contract of insurance the insured knows
more about the subject matter of the contract than the insurer.
Consequently, he is duty bound to disclose accurately all material facts
and nothing should be withheld or concealed. Any fact is material, which
goes to the root of the contract of insurance and has a bearing on the risk
involved. It is only when the insurer knows the whole truth that he is in a
position to judge (a) whether he should accept the risk and (b) what
premium he should charge.
If that were so, the insured might be tempted to bring about the event
insured against in order to get money.

· INSURABLE INTREST - A contract of insurance effected without

insurable interest is void. It means that the insured must have an actual
pecuniary interest and not a mere anxiety or sentimental interest in the
subject matter of the insurance. The insured must be so situated with
regard to the thing insured that he would have benefit by its existence
and loss from its destruction. The owner of a ship run a risk of losing his
ship, the charterer of the ship runs a risk of losing his freight and the
owner of the cargo incurs the risk of losing his goods and profit. So, all
these persons have something at stake and all of them have insurable
interest. It is the existence of insurable interest in a contract of insurance,
which distinguishes it from a mere watering agreement.

· CAUSA PROXIMA - The rule of causa proxima means that the

cause of the loss must be proximate or immediate and not remote. If the
proximate cause of the loss is a peril insured against, the insured can
recover. When a loss has been brought about by two or more causes, the
question arises as to which is the causa proxima, although the result
could not have happened without the remote cause. But if the loss is
brought about by any cause attributable to the misconduct of the insured,
the insurer is not liable.
Risk - In a contract of insurance the insurer undertakes to protect the
insured from a specified loss and the insurer receive a premium for
running the risk of such loss. Thus, risk must attach to a policy.

· Mitigation of Loss - In the event of some mishap to the insured

property, the insured must take all necessary steps to mitigate or
minimize the loss, just as any prudent person would do in those
circumstances. If he does not do so, the insurer can avoid the payment of
loss attributable to his negligence. But it must be remembered that
though the insured is bound to do his best for his insurer, he is, not bound
to do so at the risk of his life.

· Subrogation - The doctrine of subrogation is a corollary to the

principle of indemnity and applies only to fire and marine insurance.
According to it, when an insured has received full indemnity in respect
of his loss, all rights and remedies which he has against third person will
pass on to the insurer and will be exercised for his benefit until he (the
insurer) recoups the amount he has paid under the policy. It must be
clarified here that the insurer's right of subrogation arises only when he
has paid for the loss for which he is liable under the policy and this right
extend only to the rights and remedies available to the insured in respect
of the thing to which the contract of insurance relates.
•Offer & Acceptance - In order to create a valid insurance contract,
there should be a lawful acceptance of the same by the insurer. Term
lawful means offer and its acceptance must cofirm to the rules laid down
in the Indian cotract act regarding valid offer and acceptance.
•Lawful Object - Insurance contract will be invalid if hte object of
insurance is illegal or against public policy. So the object of the
insurance contract should be legal. It means insurance policy can not be
taken against unlawful object.
•Contract - Insurance is a form of contract under which one party
agrees in return of a consideration to pay an agreed amount of money to
another party to make good for a loss, damages, injury to some thing of
value in which the insured has a pecuniary intrest as a result of
some uncretain event.
Commercially insurable risks typically share seven common
characteristics.
1. A large number of homogeneous exposure units. The vast
majority of insurance policies are provided for individual members of
very large classes. Automobile insurance, for example, covered about
175 million automobiles in the United States in 2004. The existence of a
large number of homogeneous exposure units allows insurers to benefit
from the so-called “law of large nu mbers,” which in effect states
that as the number of exposure units increases, the actual results are
increasingly likely to become close to expected results. There are
exceptions to this criterion. Lloyd's of London is famous for insuring
the life or health of actors, actresses and sports figures. Satellite Launch
insurance covers events that are infrequent. Large commercial property
policies may insure exceptional properties for which there are no
‘homogeneous’ exposure units. Despite failing on this criterion, many
exposures like these are generally considered to be insurable.
2. Definite Loss. The event that gives rise to the loss that is subject to
insurance should, at least in principle, take place at a known time, in a
known place, and from a known cause. The classic example is death of
an insured person on a life insurance policy. Fire, automobile accidents,
and worker injuries may all easily meet this criterion. Other types of
losses may only be definite in theory. Occupational disease, for instance,
may involve prolonged exposure to injurious conditions where no
specific time, place or cause is identifiable. Ideally, the time, place and
cause of a loss should be clear enough that a reasonable person, with
sufficient information, could objectively verify all three elements.

3. Accidental Loss. The event that constitutes the trigger of a claim

should be fortuitous, or at least outside the control of the beneficiary of
the insurance. The loss should be ‘pure,’ in the sense that it results from
an event for which there is only the opportunity for cost. Events that
contain speculative elements, such as ordinary business risks, are
generally not considered insurable.
4. Large Loss. The size of the loss must be meaningful from the
perspective of the insured. Insurance premiums need to cover both the
expected cost of losses, plus the cost of issuing and administering the
policy, adjusting losses, and supplying the capital needed to reasonably
assure that the insurer will be able to pay claims. For small losses these
latter costs may be several times the size of the expected cost of losses.
There is little point in paying such costs unless the protection offered has
real value to a buyer.
5. Affordable Premium. If the likelihood of an insured event is so
high, or the cost of the event so large, that the resulting premium is large
relative to the amount of protection offered, it is not likely that anyone
will buy insurance, even if on offer. Further, as the accounting
profession formally recognizes in financial accounting standards, the
premium cannot be so large that there is not a reasonable chance of a
significant loss to the insurer. If there is no such chance of loss, the
transaction may have the form of insurance, but not the substance.
6. Calculable Loss. There are two elements that must be at least
estimable, if not formally calculable: the probability of loss, and the
attendant cost. Probability of loss is generally an empirical exercise,
while cost has more to do with the ability of a reasonable person in
possession of a copy of the insurance policy and a proof of loss
associated with a claim presented under that policy to make a reasonably
definite and objective evaluation of the amount of the loss recoverable as
a result of the claim.

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

often aggregation. If the same event can cause losses to numerous
policyholders of the same insurer, the ability of that insurer to issue
policies becomes constrained, not by factors surrounding the individual
characteristics of a given policyholder, but by the factors surrounding
the sum of all policyholders so exposed. Typically, insurers prefer to
limit their exposure to a loss from a single event to some small portion
of their capital base, on the order of 5 percent. Where the loss can be
aggregated, or an individual policy could produce exceptionally large
claims, the capital constraint will restrict an insurer's appetite for
additional policyholders. The classic example is earthquake insurance,
where the ability of an underwriter to issue a new policy depends on the
number and size of the policies that it has already underwritten. Wind
insurance in hurricane zones, particularly along coast lines, is another
example of this phenomenon. In extreme cases, the aggregation can
affect the entire industry, since the combined capital of insurers and
reinsurers can be small compared to the needs of potential policyholders
in areas exposed to agg regation risk. In commercial fire insurance it
is possible to find single properties whose total exposed value is well in
excess of any individual insurer’s capital constraint.
INDEMNIFICATION
The technical definition of "indemnity" means to make whole again.
There are two types of insurance contracts; 1) an "indemnity" policy and
2) a "pay on behalf" or "on behalf of" policy. The difference is
significant on paper, but rarely material in practice.
An "indemnity" policy will never pay claims until the insured has paid
out of pocket to some third party; for example, a visitor to your home
slips on a floor that you left wet and sues you for $10,000 and wins.
Under an "indemnity" policy the homeowner would have to come up
with the $10,000 to pay for the visitor's fall and then would be
"indemnified" by the insurance carrier for the out of pocket costs (the
$10,000).
Under the same situation, a "pay on behalf" policy, the insurance carrier
would pay the claim and the insured (the homeowner) would not be out
of pocket for anything. Most modern liability insurance is written on the
basis of "pay on behalf" language.
An entity seeking to transfer risk (an individual, corporation, or
association of any type, etc.) becomes the 'insured' party once risk is
 assumed by an 'insurer', the insuring party, by means of a contract,
called an insurance 'policy'. Generally, an insurance contract includes, at
a minimum, the following elements: the parties (the insurer, the insured,
the beneficiaries), the premium, the period of coverage, the particular loss
event covered, the amount of coverage (i.e., the amount to be paid
to the insured or beneficiary in the event of a loss), and exclusions
(events not covered). An insured is thus said to be "indemnified"
against the loss events covered in the policy.
When insured parties experience a loss for a specified peril, the coverage
entitles the policyholder to make a 'claim' against the insurer for the
covered amount of loss as specified by the policy. The fee paid by the
insured to the insurer for assuming the risk is called the 'premium'.

INSURER'S BUSINESS MODEL

Profit = earned premium + investment income - incurred loss -
underwriting expenses.
Insurers make money in two ways: (1) through un derwriting, the
process by which insurers select the risks to insure and decide how much
in premiums to charge for accepting those risks and (2) by investing the
premiums they collect from insured parties.
The most complicated aspect of the insurance business is the
un derwriting of policies. Using a wide assortment of data, insurers
predict the likelihood that a claim will be made against their policies and
price products accordingly. To this end, insurers use actuarial
science to quantify the risks they are willing to assume and the
premium they will charge to assume them. Data is analyzed to fairly
accurately project the rate of future claims based on a given risk.
Actuarial science uses statistics and probabili ty to analyze the risks
associated with the range of perils covered, and these scientific
principles are used to determine an insurer's overall exposure. Upon
termination of a given policy, the amount of premium collected and the
investment gains thereon minus the amount paid out in claims is the
insurer's un derwriting profit on that policy. Of course, from the
insurer's perspective, some policies are winners (i.e., the insurer pays out
less in claims and expenses than it receives in premiums and investment
income) and some are losers (i.e., the insurer pays out more in claims
and expenses than it receives in premiums and investment income).
An insurer's underwriting performance is measured in its combined
ratio. The loss ratio (incurred losses and loss-adjustment expenses
divided by net earned premium) is added to the expense ratio
(underwriting expenses divided by net premium written) to determine
the company's combined ratio. The combined ratio is a reflection of the
company's overall un derwriting profitability. A combined ratio of less
than 100 percent indicates underwriting profitability, while anything
over 100 indicates an underwriting loss.
Insurance companies also earn investment profits on “float”. “Float”
or available reserve is the amount of money, at hand at any given
moment, that an insurer has collected in insurance premiums but has not
been paid out in claims. Insurers start investing insurance premiums as
soon as they are collected and continue to earn interest on them until
claims are paid out.
In the United States, the underwriting loss of property and
casualty insurance companies was $142.3 billion in the five years
ending 2003. But overall profit for the same period was $68.4 billion, as
the result of float. Some insurance industry insiders, most notably Hank
Gree nberg, do not believe that it is forever possible to sustain a profit
from float without an underwriting profit as well, but this opinion is not
universally held. Naturally, the “float” method is difficult to carry out in
an economically depressed period. Bear markets do cause insurers to
shift away from investments and to toughen up their underwriting
standards. So a poor economy generally means high insurance
premiums. This tendency to swing between profitable and unprofitable
periods over time is commonly known as the "underwriting" or
insurance cycle. [6]
Property and casualty insurers currently make the most money from
their auto insurance line of business. Generally better statistics are
available on auto losses and underwriting on this line of business has
benefited greatly from advances in computing. Additionally, property
losses in the United States, due to natural catastrophes, have
exacerbated this trend.
Finally, claims and loss handling is the materialized utility of insurance.
In managing the claims-handling function, insurers seek to balance the
elements of customer satisfaction, administrative handling expenses, and
claims overpayment leakages. As part of this balancing act, fraudulent
insurance practices are a major business risk that must be managed
and overcome.

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. Below are (non-exhaustive) lists of the many different
types of insurance that exist. A single policy may cover risks in one or
more of the categories set out below. For example, auto insurance would
typically cover both property risk (covering the risk of theft or damage
to the car) and liability risk (covering legal claims from causing an
accident). A homeowner's insurance policy in the U.S. typically
includes property insurance covering damage to the home and the
owner's belongings, liability insurance covering certain legal claims
against the owner, and even a small amount of coverage for medical
expenses of guests who are injured on the owner's property.
Business insurance can be any kind of insurance that protects
businesses against risks. Some principal subtypes of business 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 owner's 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.
AUTO INSURANCE
Auto insurance protects you against financial loss if you have an
accident. It is a contract between you and the insurance company. You
agree to pay the premium and the insurance company agrees to pay your
losses as defined in your policy. Auto insurance provides property,
liability and medical coverage: (1) Property coverage pays for damage to
or theft of your car. (2) Liability coverage pays for your legal
responsibility to others for bodily injury or property damage. and (3)
Medical coverage pays for the cost of treating injuries, rehabilitation and
sometimes lost wages and funeral expenses. . Most states require you to buy
some, but not all, of these coverages. If you're financing a car, your
lender may also have requirements.
HOME INSURANCE
What is homeowners insurance?
Homeowners insurance provides financial protection against disasters. A
standard policy insures the home itself and the things you keep in it.
Homeowners insurance is a package policy. This means that it covers
both damage to your property and your liability or legal responsibility
for any injuries and property damage you or members of your family
cause to other people. This includes damage caused by household pets.
Damage caused by most disasters is covered but there are exceptions.
The most significant are damage caused by floods, earthquakes and poor
maintenance. You must buy two separate policies for flood and
earthquake coverage. Maintenance-related problems are the
homeowners' responsibility.

HEALTH INSURANCE
Almost all developed countries have government-supplied insurance for
health
Health insurance policies by the National Health Service in the
United Kingd om (NHS) or other publicly-funded health programs
will cover the cost of medical treatments. Dental insurance, like medical
insurance, is coverage for individuals to protect them against dental
costs. In the U.S., dental insurance is often part of an employer's benefits
package, along with health insurance. Most countries rely on public
funding to ensure that all citizens have un iversal acc ess to health
ca r e .

DISABILITY INSURANCE
• 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 disabili ty 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.
• Workers' compensation insurance replaces all or part of a
worker's wages lost and accompanying medical expenses incurred
because of a job-related injury.
CASUALTY
Casualty insurance insures against accidents, not necessarily tied to any
specific property.
• Crime insurance is a form of casualty insurance that covers the
policyholder against losses arising from the criminal acts of third parties.
For example, a company can obtain crime insurance to cover losses
arising from theft or embezzlement.
• Poli tical risk insurance is a form of casualty insurance that
can be taken out by businesses with operations in coun tries in which
there is a risk that revolution or other poli tical conditions will result
in a loss.
LIFE INSURANCE
Life insurance provides a monetary benefit to a descedent's family or
other designated beneficiary, and may specifically provide for income to
an insured person's family, burial, fun eral 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.
Ann uities 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.
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 annuities and endowment
poli cies, are financial instruments to accumulate or li quidate
wealth when it is needed.
In many countries, such as the U.S. and the UK, the 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.
Life insurance or life assurance is a contract between the policy
owner and the insurer, where the insurer agrees to pay a sum of money
upon the occurrence of the insured individual's or individuals' death or
other event, such as terminal illness or critical illness. In return, the
policy owner agrees to pay a stipulated amount called a premium at
regular intervals or in lump sums. There may be designs in some
countries where bills and death expenses plus catering for after funeral
expenses should be included in Policy Premium. In the United States,
the predominant form simply specifies a lump sum to be paid on the
insured's demise.
As with most insurance policies, life insurance is a contract between the
insurer and the policy owner whereby a benefit is paid to the designated
beneficiaries if an insured event occurs which is covered by the policy.
To be a life policy the insured event must be based upon the lives of the
people named in the policy.

DEATH PROCEEDS
Upon the insured's death, the insurer requires acceptable proof of death
before it pays the claim. The normal minimum proof required is a death
certificateand the insurer's claim form completed, signed (and typically
notarized). If the insured's death is suspicious and the policy amount is
large, the insurer may investigate the circumstances surrounding the
death before deciding whether it has an obligation to pay the claim.
Proceeds from the policy may be paid as a lump sum or as an annuity,
which is paid over time in regular recurring payments for either a
specified period or for a beneficiary's lifetime.
INSURANCE vs. ASSURANCE
Outside the the specific uses of the terms "insurance" and "assurance"
are sometimes confused. In general, in these jurisdictions "insurance"
refers to providing cover for an event that might happen (fire, theft,
flood, etc.), while "assurance" is the provision of cover for an event that
is certain to happen. However, in the United States both forms of
coverage are called "insurance", principally due to many companies
offering both types of policy, and rather than refer to themselves using
both insurance and assurance titles, they instead use just one.

TYPES OF LIFE INSURANCE

Life insurance may be divided into two basic classes – temporary and
permanent or following subclasses - term, universal, whole life, variable,
variable universal and endowment life insurance.
TEMPORARY (Term)
Term life insuranceor 'term assurance' provides for life insurance
coverage for a specified term of years for a specified premium. The
policy does not accumulate cash value. Term is generally considered
"pure" insurance, where the premium buys protection in the event of
death and nothing else.
The three key factors to be considered in term insurance are: face
amount (protection or death benefit), premium to be paid (cost to the
insured), and length of coverage (term).
Various insurance companies sell term insurance with many different
combinations of these three parameters. The face amount can remain
constant or decline. The term can be for one or more years. The
premium can remain level or increase. A common type of term is called
annual renewable term. It is a one year policy but the insurance company
guarantees it will issue a policy of equal or lesser amount without regard
to the insurability of the insured and with a premium set for the insured's
age at that time. Another common type of term insurance is mortgage
insurance, which is usually a level premium, declining face value policy.
The face amount is intended to equal the amount of the mortgage on the
policy owner’s residence so the mortgage will be paid if the insured dies.
A policy holder insures his life for a specified term. If he dies before that
specified term is up, his estate or named beneficiary(ies) receive(s) a
payout. If he does not die before the term is up, he receives nothing. In
the past these policies would almost always exclude suicide. However,
after a number of court judgments against the industry, payouts do occur
on death by suicide (presumably except for in the unlikely case that it
can be shown that the suicide was just to benefit from the policy).
Generally, if an insured person commits suicide within the first two
policy years, the insurer will return the premiums paid.
PERMANENT
Permanent life insurance is life insurance that remains in force (in-line)
until the policy matures (pays out), unless the owner fails to pay the
premium when due (the policy expires OR policies lapse). The policy
cannot be canceled by the insurer for any reason except fraud in the
application, and that cancellation must occur within a period of time
defined by law (usually two years). Permanent insurance builds a cash
value that reduces the amount at risk to the insurance company and thus
the insurance expense over time. This means that a policy with a million
dollars face value can be relatively expensive to a 70 year old. The
owner can access the money in the cash value by withdrawing money,
borrowing the cash value, or surrendering the policy and receiving the
surrender value.
The three basic types of permanent insurance are whole life, universal
life, and endowment.
Whole life coverage
Whole life insuranceprovides for a level premium, and a cash value
table included in the policy guaranteed by the company. The primary
advantages of whole life are guaranteed death benefits, guaranteed cash
values, fixed and known annual premiums, and mortality and expense
charges will not reduce the cash value shown in the policy. The primary
disadvantages of whole life are premium inflexibility, and the internal
rate of return in the policy may not be competitive with other savings
alternatives. Riders are available that can allow one to increase the death
benefit by paying additional premium. The death benefit can also be
increased through the use of policy dividends. Dividends cannot be
guaranteed and may be higher or lower than historical rates over time.
Premiums are much higher than term insurance in the short-term, but
cumulative premiums are roughly equal if policies are kept in force until
average life expectancy.
Cash value can be accessed at any time through policy "loans". Since
these loans decrease the death benefit if not paid back, payback is
optional.
Universal life coverage
Universal life insurance (UL) is a relatively new insurance product
intended to provide permanent insurance coverage with greater
flexibility in premium payment and the potential for a higher internal
rate of return. There are several types of universal life insurance policies
which include "interest sensitive" (also known as "traditional fixed
universal life insurance"), variable universal life insurance, and equity
indexed universal life insurance.
A universal life insurance policy includes a cash account. Premiums
increase the cash account. Interest is paid within the policy (credited) on
the account at a rate specified by the company. This rate may have a
guaranteed minimum (for fixed ULs) or no minimum (for variable ULs).
Mortality charges and administrative costs are then charged against
(reduce) the cash account. The surrender value of the policy is the
amount remaining in the cash account less applicable surrender charges,
if any.
With all life insurance, there are basically two functions that make it
work. There's a mortality function and a cash function. The mortality
function would be the classical notion of pooling risk where the
premiums paid by everybody else would cover the death benefit for the
one or two who will die for a given period of time. The cash function
inherent in all life insurance says that if a person is to reach age 95 to
100 (the age varies depending on state and company), then the policy
matures and endows the face value of the policy.
Actuarially, it is reasoned that out of a group of 1000 people, if even 10
of them live to age 95, then the mortality function alone will not be able
to cover the cash function. So in order to cover the cash function, a
minimum rate of investment return on the premiums will be required in
the event that a policy matures.
Universal life insurance addresses the perceived disadvantages of whole
life. Premiums are flexible. Depending on how interest is credited, the
internal rate of return can be higher because it moves with prevailing
interest rates (interest-sensitive) or the financial markets (Equity Indexed
Universal Life and Variable Universal Life). Mortality costs and
administrative charges are known. And cash value may be considered
more easily attainable because the owner can discontinue premiums if
the cash value allows it. And universal life has a more flexible death
benefit because the owner can select one of two death benefit options,
Option A and Option B.
Option A pays the face amount at death as it's designed to have the cash
value equal the death benefit at maturity (usually at age 95 or 100). With
each premium payment, the policy owner is reducing the cost of
insurance until the cash value reaches the face amount upon maturity.
Option B pays the face amount plus the cash value, as it's designed to
increase the net death benefit as cash values accumulate. Option B offers
the benefit of an increasing death benefit every year that the policy stays
in force. The drawback to option B is that because the cash value is
accumulated "on top of" the death benefit, the cost of insurance never
decreases as premium payments are made. Thus, as the insured gets
older, the policy owner is faced with an ever increasing cost of insurance
(it costs more money to provide the same initial face amount of
insurance as the insured gets older).
Both death benefit options - A (level) and B (increasing) - are subject to
the same IRS rules and guidelines concerning premium payments and
tax-favored treatment of cash values. In order for the policy to keep its
tax favored life insurance status, it must stay within a corridor specified
by state and federal laws that prevent abuses such as attaching a million
dollars in cash value to a two dollar insurance policy. The interesting
part about this corridor is that for those people who can make it to age
95-100, this corridor requirement goes away and your cash value can
equal exactly the face amount of insurance. If this corridor is ever
violated, then the universal life policy will be treated as, and in effect
turn into, a Modified Endowment Contract (or more commonly referred
to as a MEC).
But universal life has its own disadvantages which stem primarily from
this flexibility. The policy lacks the fundamental guarantee that the
policy will be in force unless sufficient premiums have been paid and
cash values are not guaranteed.
Early universal life policies are sometimes erroneously referred to as
self-sustaining policies. In the 1980s, when interest rates were high, the
cash value accumulated at a more accelerated rate, and universal life
coverage was often sold by agents as a policy that could be self-paying.
Many policies did sustain themselves for a prolonged period, but the
combination of lower interest rates and an increasing cost of insurance
as the insured ages meant that for many policies, the cash option was
diminished or depleted.
Interest-Sensitive Universal Life Insurance An interest sensitive
UL policy was the first attempt at creating a flexible premium life
insurance policy and was created in the 1980s. Interest-sensitive UL
policies guarantee, to some extent, the death proceeds, but not the cash
function - thus the flexible premiums and interest returns. If interest
rates are high, then the investment returns help reduce the required
premiums needed to keep the policy in force. If interest rates are low,
 then the customer would have to pay additional premiums in order to
keep the policy in force. When interest rates are above the minimum
required or minimum guaranteed interest rate, then the customer has the
flexibility to pay less as investment returns cover the remainder to keep
the policy in force.
Equity-Indexed Universal Life Insurance
Equity-Indexed Universal Life Insurance or "EIUL" for short, is a fixed
universal life insurance policy that was created in the mid 1990s to
address concerns about market volatility and provide an alternative to
the low interest rates being offered by interest-sensitive UL policies.
EIULs differ from interest-sensitive UL policies in that they credit
interest to the policy's cash values based on the upward movement of a
particular stock market index - usually the S&P500. The insurance
company can then credit the gains in the stock market according to one
of several different crediting methods. The most popular is the "point-to-
point" method. When the policy is issued, the insurance company "pegs"
the stock market's value. At the anniversary of the policy, the insurance
company checks the value of the underlying stock index and credits the
cash value with the difference up to a cap (specified by the company). For
example, if a policy owner purchased an EIUL on January, and the
insurance company used the S&P500 as the underlying index when
crediting interest to policy cash values, and the company set a 12 % cap,
the process would work like this:
If the S&P500 was 1,100 in January, the insurance company would
record the value of the index. On the anniversary of the policy (the next
January), the insurance company would record the new value of the
S&P500. If the new value of the index was 1,188, that would represent a
gain of 8%. The insurance company would credit the policy cash values
with 8% for that year.
If the S&P500 lost value (i.e. the value went from 1,100 to 980), the
insurance company would simply record a "0", and the policy would
show a year of no growth. The policy owner would not; however, lose
any money (principal or interest from a previous year) as a result of a
negative return on the S&P500.
If the S&P500 was 1,100 in January, the insurance company would
record the value of the index. On the anniversary of the policy (the next
January), the insurance company would record the new value of the
S&P500. If the new value of the index was 1,320, that would represent a
gain of 20%. The cap set by the insurance company is 12%, so the
insurance company would credit the policy cash values with 12% for
that year.
Since the insurance company is assuming the risk for any losses, it
represents a trade off for the policy owner: The policy owner gets most
of the upside potential of the stock market without any of the downside
risks associated with an investment in the stock market.
To accomplish this feat, the insurance company uses a precise mix of
bonds and index call options.[6] Most of the premium received for this
type of policy is used to buy bonds. A small portion of the premium is
used to buy stock options (call options) on an underlying stock index.
When the value of the stock index rises, the underlying stock option
increases by a multiple of 5, 7, or 10. This produces the gains necessary
to credit the policy with the "upside potential" of the stock market
without actually having the policy owner invest directly in the stock
market.
Variable Universal Life Insurance (VUL) is another type of universal
life insurance. There are typically no guarantees associated with this
type of life insurance policy. The cash account within a VUL is held in
the insurer's "separate account" (generally in mutual funds, managed by
a fund manager). The policy owner then chooses the investments he or
she wishes to invest in. If those investments do well, the insurance
company credits the policy's cash values accordingly. If the underlying
investments do poorly, the policy owner can lose their cash value. If the
investments do poorly enough, it could cause the policy to lapse due to
insufficient funds to cover the costs of insurance.
Limited-pay
Another type of permanent insurance is Limited-pay life insurance, in
which all the premiums are paid over a specified period after which no
additional premiums are due to keep the policy in force. Common
limited pay periods include 10-year, 20-year, and paid-up at age 65.
Endowments
Endowmentsare policies in which the cash value built up inside the
policy, equals the death benefit (face amount) at a certain age. The age
this commences is known as the endowment age. Endowments are
considerably more expensive (in terms of annual premiums) than either
whole life or universal life because the premium paying period is
shortened and the endowment date is earlier.
In the United States, the Technical Corrections Act of 1988 tightened the
rules on tax shelters (creating modified endowments). These follow tax
rules as annuities and IRAs do.
Endowment Insurance is paid out whether the insured lives or dies, after
a specific period (e.g. 15 years) or a specific age (e.g. 65).

Accidental death
Accidental death is a limited life insurance that is designed to cover the
insured when they pass away due to an accident. Accidents include
anything from an injury, but do not typically cover any deaths resulting
from health problems or suicide. Because they only cover accidents,
these policies are much less expensive than other life insurances.
It is also very commonly offered as "accidental death and
dismemberment insurance", also known as an AD&D policy. In an
AD&D policy, benefits are available not only for accidental death, but
also for loss of limbs or bodily functions such as sight and hearing, etc.
Accidental death and AD&D policies very rarely pay a benefit; either
the cause of death is not covered, or the coverage is not maintained after
the accident until death occurs. To be aware of what coverage they have,
an insured should always review their policy for what it covers and what
it excludes. Often, it does not cover an insured who puts themselves at
risk in activities such as: parachuting, flying an airplane, professional
sports, or involvement in a war (military or not). Also, some insurers
will exclude death and injury caused by proximate causes due to (but not
limited to) racing on wheels and mountaineering.
Accidental death benefits can also be added to a standard life insurance
policy as a rider. If this rider is purchased, the policy will generally pay
double the face amount if the insured dies due to an accident. This used
to be commonly referred to as a double indemnity coverage. In some
cases, some companies may even offer a triple indemnity cover.
Related life insurance products
Riders are modifications to the insurance policy added at the same time
the policy is issued. These riders change the basic policy to provide
some feature desired by the policy owner. A common rider is accidental
death, which used to be commonly referred to as "double indemnity",
which pays twice the amount of the policy face value if death results
from accidental causes, as if both a full coverage policy and an
accidental death policy were in effect on the insured.
Joint life insurance is either a term or permanent policy insuring two or
more lives with the proceeds payable on the first death.
Survivorship life or second-to-die life is a whole life policy insuring
two lives with the proceeds payable on the second (later) death.
Single premium whole life is a policy with only one premium which is
payable at the time the policy is issued.
Modified whole life is a whole life policy that charges smaller
premiums for a specified period of time after which the premiums
increase for the remainder of the policy.
Group life insurance is term insurance covering a group of people,
usually employees of a company or members of a union or association.
Individual proof of insurability is not normally a consideration in the
underwriting. Rather, the underwriter considers the size and turnover of
the group, and the financial strength of the group. Contract provisions
will attempt to exclude the possibility of adverse selection. Group life
insurance often has a provision that a member exiting the group has the
right to buy individual insurance coverage.

Investment policies
With-profits policies
Some policies allow the policyholder to participate in the profits of the
insurance company these are with-profits policies. Other policies have
no rights to participate in the profits of the company, these are non-
profit policies.
With-profits policies are used as a form of collective investment to
achieve capital growth. Other policies offer a guaranteed return not
dependent on the company's underlying investment performance; these
are often referred to as without-profit policies which may be construed
as a misnomer.

Insurance/Investment Bonds
Pensions
Pensions are a form of life assurance. However, whilst basic life
assurance, permanent health insurance and non-pensions annuity
business includes an amount of mortalityor morbidity riskfor the
insurer, for pensions there is a longevity risk.
A pension fund will be built up throughout a person's working life.
When the person retires, the pension will become in payment, and at
some stage the pensioner will buy an annuity contract, which will
guarantee a certain pay-out each month until death.
Annuities
An annuity is a contract with an insurance company whereby the
purchaser pays an initial premium or premiums into a tax-deferred
account, which pays out a sum at pre-determined intervals. There are
two periods: the accumulation (when payments are paid into the
account) and the annuitization (when the insurance company pays out).
For example, a policy holder may pay £10,000, and in return receive
£150 each month until he dies; or £1,000 for each of 14 years or death
benefits if he dies before the full term of the annuity has elapsed. Tax
penalties and insurance company surrender charges may apply to
premature withdrawals (if indeed these are allowed; in most markets
outside the U.S. the policy owner has no right to end the contract
prematurely).

Tax and life insurance

Taxation of life insurance in the United States
Premiums paid by the policy owner are normally not deductible for
federal and state income taxpurposes.
Proceeds paid by the insurer upon death of the insured are not included
in gross income for federal and state income tax purposes; however, if
the proceeds are included in the "estate" of the deceased, it is likely they
will be subject to federal and state estate and inheritance tax.
Cash value increases within the policy are not subject to income taxes
unless certain events occur. For this reason, insurance policies can be a
legal and legitimate tax shelter wherein savings can increase without
taxation until the owner withdraws the money from the policy. On
flexible-premium policies, large deposits of premium could cause the
contract to be considered a "Modified Endowment Contract" by the
Internal Revenue Service (IRS), which negates many of the tax
advantages associated with life insurance. The insurance company, in
most cases, will inform the policy owner of this danger before applying
their premium.
Tax deferred benefit from a life insurance policy may be offset by its
low return in some cases. This depends upon the insuring company, type
of policy and other variables (mortality, market return, etc.). Also, other
income tax saving vehicles (i.e. Individual Retirement Account (IRA),
401K or Roth IRA) may be better alternatives for value accumulation.
This will depend on the individual and their specific circumstances.
The tax ramifications of life insurance are complex. The policy owner
would be well advised to carefully consider them. As always, the United
States Congressor the state legislatures can change the tax laws at any
time.

Taxation of life assurance in the United Kingdom

Premiums are not usually allowable against income tax or corporation
tax, however qualifying policies issued prior to 14 March 1984 do still
attract LAPR (Life Assurance Premium Relief) at 15% (with the net
premium being collected from the policyholder).
Non-investment life policies do not normally attract either income tax or
capital gains tax on claim. If the policy has as investment element such
as an endowment policy, whole of life policy or an investment bond then
the tax treatment is determined by the qualifying status of the policy.
Qualifying status is determined at the outset of the policy if the contract
meets certain criteria. Essentially, long term contracts (10 years plus)
tend to be qualifying policies and the proceeds are free from income tax
and capital gains tax. Single premium contracts and those run for a short
term are subject to income tax depending upon your marginal rate in the
year you make a gain. All (UK) insurers pay a special rate of corporation
tax on the profits from their life book; this is deemed as meeting the
lower rate (20% in 2005-06) liability for policyholders. Therefore a
policyholder who is a higher rate taxpayer (40% in 2005-06), or
becomes one through the transaction, must pay tax on the gain at the
difference between the higher and the lower rate. This gain is reduced by
applying a calculation called top-slicing based on the number of years
the policy has been held. Although this is complicated, the taxation of
life assurance based investment contracts may be beneficial compared to
alternative equity-based collective investment schemes (unit trusts,
investment trusts and OEICs). One feature which especially favors
investment bonds is the '5% cumulative allowance' – the ability to draw
5% of the original investment amount each policy year without being
subject to any taxation on the amount withdrawn. If not used in one year,
the 5% allowance can roll over into future years, subject to a maximum
tax deferred withdrawal of 100% of the premiums payable. The
withdrawal is deemed by the HMRC(Her Majesty's Revenue and
Customs) to be a payment of capital and therefore the tax liability is
deferred until maturity or surrender of the policy. This is an especially
useful tax planning tool for higher rate taxpayers who expect to become
basic rate taxpayers at some predictable point in the future (e.g.
retirement), as at this point the deferred tax liability will not result in tax
being due.
The proceeds of a life policy will be included in the estate for death duty
(in the UK, inheritance tax(IHT)) purposes, except that policies written
in trustmay fall outside the estate. Trust law and taxation of trusts can
be complicated, so any individual intending to use trusts for tax planning
would usually seek professional advice from an Independent Financial
Adviser(IFA) and/or a solicitor.
Pension Term Assurance
Although available before April 2006, from this date pension term
assurancebecame widely available in the UK. Most UK product
providers adopted the name "life insurance with tax relief" for the
product. Pension term assurance is effectively normal term life
assurance with tax relief on the premiums. All premiums are paid net of
basic rate tax at 22%, and higher rate tax payers can gain an extra 18%
tax relief via their tax return. Although not suitable for all, PTA briefly
became one of the most common forms of life assurance sold in the UK
until the Chancellor, Gordon Brown, announced the withdrawal of the
scheme in his pre-budget announcement on 6 December 2006. The tax
relief ceased to be available to new policies transacted after 6 December
2006, however, existing policies have been allowed to enjoy tax relief so
far.
History
Insurance began as a way of reducing the risk of traders, as early as 5000
BC in Chinaand 4500 BC in Babylon. Life insurance dates only to
ancient Rome; "burial clubs" covered the cost of members' funeral
expenses and helped survivors monetarily. Modern life insurance started
in late 17th century England, originally as insurance for traders:
merchants, ship owners and underwriters met to discuss deals at Lloyd's
Coffee House, predecessor to the famous Lloyd's of London.
The first insurance company in the United Stateswas formed in
Charleston, South Carolina in 1732, but it provided only fire insurance.
The sale of life insurance in the U.S. began in the late 1760s. The
Presbyterian Synods in Philadelphia and New Yorkcreated the
Corporation for Relief of Poor and Distressed Widows and Children of
Presbyterian Ministers in 1759; Episcopalianpriests organized a similar
fund in 1769. Between 1787 and 1837 more than two dozen life
insurance companies were started, but fewer than half a dozen survived.
Prior to the American Civil War, many insurance companies in the
United States insured the lives of slaves for their owners. In response
to bills passed in Californiain 2001 and in Illinoisin 2003, the
companies have been required to search their records for such policies.
New York
Life for example reported that Nautilus sold 485 slaveholder life
insurance policies during a two-year period in the 1840s; they added that
their trustees voted to end the sale of such policies 15 years before the
Emancipation Proclamation.
Criticism
Although some aspects of the application process (such as underwriting
and insurable interest provisions) make it difficult, life insurance
policies have been used in cases of exploitation and fraud. In the case of
life insurance, there is a motivation to purchase a life insurance policy,
particularly if the face value is substantial, and then kill the insured.
The television series Forensic Fileshas included episodes that feature
this scenario. There was also a documented case in 2006, where two
elderly women are accused of taking in homeless men and assisting
them. As part of their assistance, they took out life insurance on the men.
After the contestability period ended on the policies (most life contracts
have a standard contestability period of two years), the women are
alleged to have had the men killed via hit-and-run car crashes.[9]
Recently, viatical settlements have thrown the life insurance industry
into turmoil. A viatical settlement involves the purchase of a life
insurance policy from an elderly or terminally ill policy holder. The
policy holder sells the policy (including the right to name the
beneficiary) to a purchaser for a price discounted from the policy value.
The seller has cash in hand, and the purchaser will realize a profit when
the seller dies and the proceeds are delivered to the purchaser. In the
meantime, the purchaser continues to pay the premiums. Although both
parties have reached an agreeable settlement, insurers are troubled by
this trend. Insurers calculate their rates with the assumption that a certain
portion of policy holders will seek to redeem the cash value of their
insurance policies before death. They also expect that a certain portion
will stop paying premiums and forfeit their policies. However, viatical
settlements ensure that such policies will with absolute certainty be paid
out. Some purchasers, in order to take advantage of the potentially large
profits, have even actively sought to collude with uninsured elderly and
terminally ill patients, and created policies that would have not
otherwise been purchased. Likewise, these policies are guaranteed losses
from the insurers' perspective
PROPERTY INSURANCE
This tornado damage to an Illinois home would be considered an
"Act of God" for insurance purposes
Property insurance provides protection against risks to property, such as
fire, theft or weather damage. This includes specialized forms of
insurance such as fire insurance, floo d insurance, earthquake
insurance, home insurance, inland marine insurance or boil er
insurance.
• Automobil e insurance, known in the UK as motor insurance,
is probably the most common form of insurance and may cover both
legal li ability claims against the driver and loss of or damage to
the insured's vehicle itself. Throughout the United States an auto
insurance policy is required to legally operate a motor vehicle on public
roads. In some jurisdictions, bodily injury compensation for automobile
accident victims has been changed to a no-fault system, which reduces
or eliminates the ability to sue for compensation but provides automatic
eligibility for benefits. Credit card companies insure against damage
on rented cars.
o Driving Schoo l Insurance insurance provides cover for any
authorized driver whilst undergoing tuition, cover also unlike other
motor policies provides cover for instructor liability where both the
pupil and driving instructor are equally liable in the event of a claim.
• Aviation insurance insures against hull, spares, deductibles,
hull wear and liability risks.
• Boil er insurance (also known as boiler and machinery
insurance or equipment breakdown insurance) insures against accidental
physical damage to equipment or machinery.
• Buil der'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.
• Crop insurance "Farmers use crop insurance to reduce or
manage various risks associated with growing crops. Such risks include
crop loss or damage caused by weather, hail, drought, frost damage,
insects, or disease, for instance."
• Earthquake insurance is a form of property insurance that
pays the policyholder in the event of an earthquake that causes
damage to the property. Most ordinary homeowners insurance
policies do not cover earthquake damage. Most earthquake insurance
policies feature a high deductible. Rates depend on location and the
probability of an earthquake, as well as the construction of the
h om e.
• A fideli ty bond is a form of casualty insurance that covers
policyholders for losses that they incur as a result of fraudulent acts by
specified individuals. It usually insures a business for losses caused by
the dishonest acts of its employees.
• Floo d insurance protects against property loss due to flooding.
Many insurers in the U.S. do not provide flood insurance in some
portions of the country. In response to this, the federal government
created the National Floo d Insurance Program which serves as
the insurer of last resort.

• Home insurance or homeowners' insurance: See "Property

insurance".
• 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.
• Surety bond insurance is a three party insurance guaranteeing
the performance of the principal.
• Terr orism insurance provides protection against any loss or
damage caused by terrorist activities.
• Volcano insurance is an insurance that covers volcano damage
in Hawaii.
• Windstorm insurance is an insurance covering the damage
that can be caused by hurricanes and tropical cyclones.

LIABILITY 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 wilful or intentional acts by the insured.
• Environmental li abili ty insurance protects the insured from
bodily injury, property damage and cleanup costs as a result of the
dispersal, release or escape of pollutants.
• Errors and omissions insurance: See "Professional liability
insurance" under "Liability insurance".
• Professional li abili ty insurance, also called professional
indemnity insurance, protects insured professionals such as architectural
corporation and medical practice 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.
• Directors and off icers li abili ty insurance protects an
organization (usually a corporation) from costs associated with litigation
resulting from mistakes made by directors and officers for which they
are liable. In the industry, it is usually called "D&O" for short.
CREDIT INSURANCE
Credit insurance repays some or all of a loan when certain things
happen to the borrower such as un employment, disabili ty, or
d eat h .
• Mortgage insurance insures the lender against default by the
borrower. 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.
OTHER TYPES
• Coll ateral protection insurance or CPI, insures property
(primarily vehicles) held as collateral for loans made by lending
institutions.
• Defense Base Act Workers' compensation or DBA
Insurance provides coverage for civilian workers hired by the
government to perform contracts outside the U.S. and Canada. DBA is
required for all U.S. citizens, U.S. residents, U.S. Green Card holders,
and all employees or subcontractors hired on overseas government
contracts. Depending on the country, Foreign Nationals must also be
covered under DBA. This coverage typically includes expenses related
to medical treatment and loss of wages, as well as disability and death
benefits.
• Expatriate insurance provides individuals and 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 coverage to protect it from loss of sales if a fire in a factory
prevented it from carrying out its business for a time. Insurance 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." Fideli ty 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.

• Kidnap and ransom insurance

• Locked fun ds 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.
• Pet insurance insures pets against accidents and illnesses -
some companies cover routine/wellness care and burial, as well.
• Pollution Insurance, which consists of first-party coverage for
contamination of insured property either by external or on-site sources.
Coverage for liability to third parties arising from contamination of air,
water, or land due to the sudden and accidental release of 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.
• Purchase insurance is aimed at providing protection on the
products people purchase. Purchase insurance can cover individual
purchase protection, warranties, guarantees, care plans and even mobile
phone insurance. Such insurance is normally very limited in the scope of
problems that are covered by the policy.
• Title insurance provides a guarantee that title to real
property is vested in the purchaser and/or mortgagee , free and clear
of li ens 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, loss
of personal belongings, travel delay, personal liabilities, etc.

Insurance financing vehicles

• Protected Self-Insurance is an alternative risk financing
mechanism in which an organization retains the mathematically
calculated cost of risk within the organization and transfers the
catastrophic risk with specific and aggregate limits to an insurer so the
maximum total cost of the program is known. A properly designed and
underwritten Protected Self-Insurance Program reduces and stabilizes
the cost of insurance and provides valuable risk management
information.
• 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.
• Fraternal insurance is provided on a cooperative basis by
fraternal benefit societies or other social organizations.[11]
• Formal self insurance is the deliberate decision to pay for
otherwise insurable losses out of one's own money. This can be done on
a formal basis by establishing a separate fund into which funds are
deposited on a periodic basis, or by simply forgoing the purchase of
available insurance and paying out-of-pocket. Self insurance is usually
used to pay for high-frequency, low-severity losses. Such losses, if
covered by conventional insurance, mean having to pay a premium that
includes loadings for the company's general expenses, cost of putting the
policy on the books, acquisition expenses, premium taxes, and
contingencies. While this is true for all insurance, for small, frequent
losses the transaction costs may exceed the benefit of volatility reduction
that insurance otherwise affords.
• 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.
• Reinsurance is a type of insurance purchased by insurance
companies or self-insured employers to protect against unexpected
losses. Financial reinsurance is a form of reinsurance that is
primarily used for capital management rather than to transfer insurance
risk.
• Stop-loss insurance provides protection against catastrophic
or unpredictable losses. It is purchased by organizations who do not
want to assume 100% of the liability for losses arising from the plans.
Under a stop-loss policy, the insurance company becomes liable for
losses that exceed certain limits called deductibles.
• Social insurance can be many things to many people in many
countries. But a summary of its essence is that it is a collection of
insurance coverages (including components of life insurance, disability
income insurance, unemployment insurance, health insurance, and
others), plus retirement savings, that requires 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. This is a
large, complicated topic that engenders tremendous debate, which can be
further studied in the following articles (and others):
o Social welfare provision
o Social security
o Social safety net
o National Insurance
o Social Security (United States)
o Social Security debate (United States)

CLOSED COMMUNITY SELF-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 reli gious groups,
including the Amish and some Muslim groups, depend on support
provided by their comm un ities 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 Kingd om, 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.

INSURANCE COMPANIES
Insurance companies may be classified into two groups:
• Life insurance companies, which sell life insurance, annuities and
 pensions products.
• Non-life, General, or Property/Casualty insurance companies,
which sell other types of insurance.
General insurance companies can be further divided into these sub
categories.
• Standard Lines
• Excess Lines
In most countries, life and non-life insurers are subject to different
regulatory regimes and different tax and acc oun ting rules. The main
reason for the distinction between the two types of company is that life,
annuity, and pension 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 a shorter period, such
as one year.
In the United States, standard line insurance companies are "main
stream" insurers. These are the companies that typically insure autos,
homes or businesses. They use pattern or "cookie-cutter" policies
without variation from one person to the next. They usually have lower
premiums than excess lines and can sell directly to individuals. They are
regulated by state laws that can restrict the amount they can charge for
insurance policies.
Excess line insurance companies (aka Excess and Surplus) typically
insure risks not covered by the standard lines market. They are broadly
referred as being all insurance placed with non-admitted insurers. Non-
admitted insurers are not licensed in the states where the risks are
located. These companies have more flexibility and can react faster than
standard insurance companies because they are not required to file rates
and forms as the "admitted" carriers do. However, they still have
substantial regulatory requirements placed upon them. State laws
generally require insurance placed with surplus line agents and brokers
not to be available through standard licensed insurers.
Insurance companies are generally classified as either mutual or stock
companies. Mutual companies are owned by the policyholders, while
stockholders (who may or may not own policies) own stock insurance
companies. Demutualization of mutual insurers to form stock
companies, as well as the formation of a hybrid known as a mutual
holding company, became common in some countries, such as the
United States, in the late 20th century. Other possible forms for an
insurance company include reciprocals, in which policyholders
'reciprocate' in sharing risks, and Lloyds organizations.
Insurance companies are rated by various agencies such as A. M. Best.
The ratings include the company's financial strength, which measures its
ability to pay claims. It also rates financial instruments issued by the
insurance company, such as bonds, notes, and securitization products.
Reinsurance companies are insurance companies that sell policies
to other insurance companies, allowing them to reduce their risks and
protect themselves from very large losses. The reinsurance market is
dominated by a few very large companies, with huge reserves. A
reinsurer may also be a direct writer of insurance risks as well.
Captive insurance companies may be defined as limited-purpose
insurance companies established with the specific objective of financing
risks emanating from their parent group or groups. This definition can
sometimes be extended to include some of the risks of the parent
company's customers. In short, it is an in-house self-insurance vehicle.
Captives may take the form of a "pure" entity (which is a 100%
subsidiary of the self-insured parent company); of a "mutual" captive
(which insures the collective risks of members of an industry); and of an
"association" captive (which self-insures individual risks of the members
of a professional, commercial or industrial association). Captives
represent commercial, economic and tax advantages to their sponsors
because of the reductions in costs they help create and for the ease of
insurance risk management and the flexibility for cash flows they
generate. Additionally, they may provide coverage of risks which is
neither available nor offered in the traditional insurance market at
reasonable prices.
The types of risk that a captive can underwrite for their parents include
property damage, public and product liability, professional indemnity,
employee benefits, employers' liability, motor and medical aid expenses.
The captive's exposure to such risks may be limited by the use of
reinsurance.
Captives are becoming an increasingly important component of the risk
management and risk financing strategy of their parent. This can be
understood against the following background:
• heavy and increasing premium costs in almost every line of
coverage;
• difficulties in insuring certain types of fortuitous risk;
• differential coverage standards in various parts of the world;
• rating structures which reflect market trends rather than individual
loss experience;
• insufficient credit for deductibles and/or loss control efforts.
There are also companies known as 'insurance consultants'. Like a
mortgage broker, these companies are paid a fee by the customer to shop
around for the best insurance policy amongst many companies. Similar
to an insurance consultant, an 'insurance broker' also shops around for
the best insurance policy amongst many companies. However, with
insurance brokers, the fee is usually paid in the form of commission
from the insurer that is selected rather than directly from the client.
Neither insurance consultants nor insurance brokers are insurance
companies and no risks are transferred to them in insurance transactions.
Third party administrators are companies that perform underwriting and
sometimes claims handling services for insurance companies. These
companies often have special expertise that the insurance companies do
not have.
The financial stability and strength of an insurance company should be a
major consideration when buying an insurance contract. An insurance
premium paid currently provides coverage for losses that might arise
many years in the future. For that reason, the viability of the insurance
 carrier is very important. In recent years, a number of insurance
companies have become insolvent, leaving their policyholders with no
coverage (or coverage only from a government-backed insurance pool or
other arrangement with less attractive payouts for losses). A number of
independent rating agencies, such as Best's, Fitch, Standard &
Poo r's, and Moody's Investors Service, provide information and
rate the financial viability of insurance companies.
GLOBAL INSURANCE INDUSTRY
Life insurance premia written in 2005
Non-life insurance premia written in 2005
Global insurance premiums grew by 8.0% in 2006 (or 5% in real terms)
to reach $3.7 trillion due to improved profitability and a benign
economic environment characterised by solid economic growth,
moderate inflation and strong equity markets. Profitability improved in
both life and non-life insurance in 2006 compared to the previous year.
Life insurance premiums grew by 10.2% in 2006 as demand for annuity
and pension products rose. Non-life insurance premiums grew by 5.0% due
to growth in premium rates. Over the past decade, global insurance
premiums rose by more than a half as annual growth fluctuated between
2% and 11%.
Advanced economies account for the bulk of global insurance. With
premium income of $1,485bn, Europe was the most important region,
followed by North America ($1,258bn) and Asia ($801bn). The top four
countries accounted for nearly two-thirds of premiums in 2006. The U.S.
and Japan alone accounted for 43% of world insurance, much higher
than their 7% share of the global population. Emerging markets
accounted for over 85% of the world’s population but generated only
around 10% of premiums. The volume of UK insurance business totalled
$418bn in 2006 or 11.2% of global premiums. [12 ]

CONTROVERSIES
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
might otherwise be (since, by definition, the insured has transferred the
risk to the insurer). This problem is known to the insurance industry as
moral hazard. To reduce their own financial exposure, insurance
companies have contractual clauses that mitigate their obligation to
provide coverage if the insured engages in behavior that grossly
magnifies their risk of loss or liability.
For example, life insurance companies may require higher premiums or
deny coverage altogether to people who work in hazardous occupations
or engage in dangerous sports. Liability insurance providers do not
provide coverage for liability arising from intentional torts
committed by the insured. Even if a provider were so irrational as to
want 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.
Complexity of insurance policy contracts
Insurance policies can be complex and some policyholders may not
understand all the fees and coverages included in a policy. As a result,
people may buy policies on unfavorable terms. In response to these
issues, many countries have enacted detailed statutory and regulatory
regimes governing every aspect of the insurance business, including
minimum standards for policies and the ways in which they may be
advertised and sold.
Many institutional insurance purchasers buy insurance through an
insurance broker. Brokers represent the buyer (not the insurance
company), and typically counsel the buyer on appropriate coverage and
policy limitations. A broker generally holds contracts with many
insurers, thereby allowing the broker to "shop" the market for the best
rates and coverage possible.
Insurance may also be purchased through an agent.

Redlining
Redli ning is the practice of denying insurance coverage in specific
geographic areas, supposedly because of a high likelihood of loss, while
the alleged motivation is unlawful discrimination. Racial profil ing or
redli ning has a long history in the property insurance industry in the
United States. From a review of industry underwriting and marketing
materials, court documents, and research by government agencies,
industry and community groups, and academics, it is clear that race has
long affected and continues to affect the policies and practices of the
insurance industry.

All states have provisions in their rate regulation laws or in their fair
trade practice acts that prohibit unfair discrimination, often called
redlining, in setting rates and making insurance available.

In determining premiums and premium rate structures, insurers consider

quantifiable factors, including location, credit scores, gender,
occ upation, marital status, and education level. However, the
use of such factors is often considered to be unfair or unlawfully
discriminatory, and the reaction against this practice has in some
instances led to political disputes about the ways in which insurers
determine premiums and regulatory intervention to limit the factors
used.
An insurance underwriter's job is to evaluate a given risk as to the
likelihood that a loss will occur. Any factor that causes a greater
likelihood of loss should theoretically be charged a higher rate. This
basic principle of insurance must be followed if insurance companies are
to remain solvent. Thus, "discrimination" against (i.e., negative
differential treatment of) potential insureds in the risk evaluation and
premium-setting process is a necessary by-product of the fundamentals
of insurance underwriting. For instance, insurers charge older people
significantly higher premiums than they charge younger people for term
life insurance. Older people are thus treated differently than younger
people (i.e., a distinction is made, discrimination occurs). The rationale
for the differential treatment goes to the heart of the risk a life insurer
takes: Old people are likely to die sooner than young people, so the risk
of loss (the insured's death) is greater in any given period of time and
therefore the risk premium must be higher to cover the greater risk.
However, treating insureds differently when there is no actuarially sound
reason for doing so is unlawful discrimination.
What is often missing from the debate is that prohibiting the use of
legitimate, actuarially sound factors means that an insufficient amount is
being charged for a given risk, and there is thus a deficit in the system.
The failure to address the deficit may mean insolvency and hardship for
all of a company's insureds. The options for addressing the deficit seem
to be the following: Charge the deficit to the other policyholders or
charge it to the government (i.e., externalize outside of the company to
society at large).
Insurance patents
New insurance products can now be protected from copying with a
business method patent in the United States.
A recent example of a new insurance product that is patented is Usage
Based auto insurance. Early versions were independently invented
and patented by a major U.S. auto insurance company, Progressive
Auto Insurance () and a Spanish independent inventor, Salvador
Minguijon Perez .
Many independent inventors are in favor of patenting new insurance
products since it gives them protection from big companies when they
bring their new insurance products to market. Independent inventors
account for 70% of the new U.S. patent applications in this area. One
such example is titled "Method of Expediting Insurance Claims" Patent
7,203,654 issued April 10, 2007.
Many insurance executives are opposed to patenting insurance products
because it creates a new risk for them. The Hartford insurance
company, for example, recently had to pay $80 million to an
independent inventor, Bancorp Services, in order to settle a patent
infringement and theft of trade secret lawsuit for a type of corporate
owned life insurance product invented and patented by Bancorp.

The insurance industry and rent seeking

Certain insurance products and practices have been described as rent
see king by critics. That is, some insurance products or practices are
useful primarily because of legal benefits, such as reducing taxes, as
opposed to providing protection against risks of adverse events. Under
United States tax law, for example, most owners of variable
ann uities and variable li fe insurance can invest their premium
payments in the stock market and defer or eliminate paying any taxes on
their investments until withdrawals are made. Sometimes this tax
deferral is the only reason people use these products. Another example is
the legal infrastructure which allows life insurance to be held in an
irrevocable trust which is used to pay an estate tax while the proceeds
themselves are immune from the estate tax.
Criticism of insurance companies
The neutrali ty of this article is disputed.
Please see the discussion on the talk page.
Please do not remove this message until the dispute is resolved.
Some people believe that modern insurance companies are money-
making businesses which have little interest in insurance. They 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.
• Many 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. While policyholders find their
premium payments decrease when dealing with companies who sacrifice
the use of trained insurance agents, they also risk greater financial
loss due to inadequate coverage protection. Those companies who invest
in educated insurance agents provide a valued service to the
community. Policyholders who work with knowledgeable insurance
agents are more likely to identify needs, evaluate options, purchase
sufficient insurance protection, and minimize the risk of heavy financial
loss for themselves and their family.