Insurance is a way of protection against financial loss. It is also a form of strategic risk management, largely used to mitigate the risk of an uncertain or uninsurable future. In simple terms, insurance is an investment that yields a return when all other considerations are held constant. So, insurance is like an asset that grows with time and with expenses. Like stocks or property, the cost of insuring increases over time as premiums increase and as risk increases.
Risk-tailored underwriting is one of the ways insurers evaluate risk. Underwriters look at the characteristics of risk and adjust the premium accordingly; for example, they might consider the potential losses from high-risk drivers as high-risk, or the risks associated with owning a home. Insurers may also use statistics to assess risks and the possibility of future claims.
Other factors that determine insurance rates include mortality, credit, property damage, theft, and equity issues. Mortality is determined by age, health, and the probability of death. Equity issues are those issues that affect the value of the policy, such as current value, option valuation, and replacement value. Property damage and theft are both measured on a loss-loss basis. Insurance providers normally vary the premiums they charge and underwriting guidelines to account for the risks inherent in the individual product.
Insurance companies purchase life, disability, and whole life insurance. Life insurance provides a source of income to support dependents if the insured dies. It provides cover for a family’s financial needs after the insured dies. Whole life insurance provides a source of income for beneficiaries if the insured dies during the policy term. Disability insurance provides for medical expenses and provides a source of income for the benefit testes. Premiums for these policies are based on a risk-premium ratio, which is the ratio of premium payments to the amount of claims paid, divided by the number of beneficiaries.
The two major types of insurance are fully comprehensive and limited liability. Whole life insurance and annuities provide coverage for virtually any loss or damage to property, personal effects, or cash. Most policies premiums are based on the death benefit amount, minus the policy owner’s percentage of total premium. Policy holders are permitted to choose between three types of exclusions. These exclusions include perils of failure to disclose, errors or omissions, bankruptcies, and death.
Insurance contracts are legally binding contract between an insurer and a policyholder. Insurance contracts are structured to state the extent of the insurer’s obligation to pay and the time frame in which payments must be made. The types of coverage provided are based on the type of contract and the state the policy is issued in. Two main types of insurance are group health insurance, or HMOs, and individual health insurance, or IHAs.
Many states allow private insurance companies to develop risk rating guidelines, or AHRs. An insurer’s risk ratings are a closely guarded secret, because most states restrict insurers from sharing them with the general public. According to these restrictions, insurers may only share the risk ratings for serious and high-risk diseases.
There are many forms of insurance. Health insurance provides financial protection against catastrophic illnesses, while life insurance provides financial protection against premature deaths. Homeowners’ insurance protects homeowners from unexpected loss of home. Many people invest in other forms of insurance to supplement their primary insurance, such as life insurance.
Insurance policies are categorized into two types: moral hazard and adverse selection. Moral-hazard policies involve the provision of benefits only if the insured develops a certain disease or becomes seriously ill. This condition could be caused by a causal factor that is unrelated to the insured, such as genetic disorders or high levels of occupational exposure to dangerous substances. Examples of moral hazard policies are underwriting for cancer or heart disease.
Adverse selection occurs when an insurer applies a higher premium to someone who has developed a particular pre-existing condition, or who is considered to be at high risk of developing a future condition. For example, if an insured person is over a certain age, or has health problems that could make him vulnerable to a stroke, he may be charged a high rate for life insurance. An example of this policy would be travel insurance. In order to keep the premiums affordable, travel insurance carriers require regular medical evaluations. If an older traveler develops a chronic illness that makes him a high-risk candidate for developing a disease again in the future, or an already-ill person develops a condition that could leave him unable to work, his insurer may cancel his policy or increase his premium.
Liability insurance policies provide protection against financial losses resulting from injuries or acts of third parties. Some states require that drivers carry a certain amount of liability insurance to drive. Liability insurance costs vary depending on the extent of the damage or loss and the insured’s status as a driver. In order to keep premiums low, motorists often postpone purchasing this coverage until they are injured or have a large accident. By the time they are faced with the costs of damages, many drivers have already incurred significant expenses, especially if they are unable to avoid the accident.
