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 religiousgroups,
including the Amish and
some Muslim groups,
depend on support provided by their communities when disasters strike.
The risk presented by any given person is assumed collectively by the community
who all bear the cost of rebuilding lost property and supporting people whose
needs are suddenly greater after a loss of some kind. In supportive communities
where others can be trusted to follow community leaders, this tacit form of
insurance can work. In this manner the community can even out the extreme
differences in insurability that exist among its members. Some further
justification is also provided by invoking the moral hazard of
explicit insurance contracts.
In the United Kingdom, The Crown (which,
for practical purposes, meant the civil service) did
not insure property such as government buildings. If a government building was
damaged, the cost of repair would be met from public funds because, in the long
run, this was cheaper than paying insurance premiums. Since many UK government
buildings have been sold to property companies, and rented back, this
arrangement is now less common and may have disappeared altogether.
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 accounting 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 insurers that have
received a license or authorization from a state for the purpose of writing
specific kinds of insurance in that state, such as automobile insurance or
homeowners' insurance.[27] They
are typically referred to as "admitted" insurers. Generally, such an
insurance company must submit its rates and policy forms to the state's
insurance regulator to receive his or her prior approval, although whether an
insurance company must receive prior approval depends upon the kind of
insurance being written. Standard line insurance companies usually charge lower
premiums than excess line insurers and may sell directly to individual
insureds. They are regulated by state laws, which include restrictions on rates
and forms, and which aim to protect consumers and the public from unfair or
abusive practices.[27] These
insurers also are required to contribute to state guarantee funds, which are
used to pay for losses if an insurer becomes insolvent.[27]
Excess
line insurance companies (also known as Excess and Surplus) typically insure
risks not covered by the standard lines insurance market, due to a variety of
reasons (e.g., new entity or an entity that does not have an adequate loss
history, an entity with unique risk characteristics, or an entity that has a
loss history that does not fit the underwriting requirements of the standard
lines insurance market).[27] They
are typically referred to as non-admitted or unlicensed insurers.[27] Non-admitted
insurers are generally not licensed or authorized in the states in which they
write business, although they must be licensed or authorized in the state in
which they are domiciled.[27] These
companies have more flexibility and can react faster than standard line
insurance companies because they are not required to file rates and forms.[27] However,
they still have substantial regulatory requirements placed upon them.
Most
states require that excess line insurers submit financial information, articles
of incorporation, a list of officers, and other general information.[27] They
also may not write insurance that is typically available in the admitted
market, do not participate in state guarantee funds (and therefore
policyholders do not have any recourse through these funds if an insurer
becomes insolvent and cannot pay claims), may pay higher taxes, only may write
coverage for a risk if it has been rejected by three different admitted
insurers, and only when the insurance producer placing the business has a
surplus lines license. Generally, when an excess line insurer writes a
policy, it must, pursuant to state laws, provide disclosure to the policyholder
that the policyholder's policy is being written by an excess line insurer.
On July
21, 2010, President Barack
Obama signed into law the Nonadmitted and Reinsurance Reform Act of 2010 ("NRRA"),
which took effect on July 21, 2011 and was part of the Dodd-Frank Wall Street Reform
and Consumer Protection Act. The NRRA changed the regulatory
paradigm for excess line insurance. Generally, under the NRRA, only the insured's
home state may regulate and tax the excess line transaction.
Insurance
companies are generally classified as either mutual or
proprietary companies. Mutual companies are owned by the policyholders, while
shareholders (who may or may not own policies) own proprietary 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. However, not all states permit mutual
holding companies.
Other
possible forms for an insurance company include reciprocals, in which policyholders
reciprocate in sharing risks, and Lloyd's 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 provide information and rate the
financial viability of insurance companies.
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