TYPE 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 forth 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 health insurance 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 :

• The various kinds of professional liability insurance, also called professional indemnity insurance, which are discussed below under that name; and
  
• The business owners 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.

Health Insurance

Almost all developed countries have government-supplied insurance for health. Health insurance policies will often cover the cost of private medical treatments if the National Health Service in the UK (NHS) or other publicly-funded health programs do not pay for them. It will often result in quicker health care where better facilities are available. 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 universal access to health care.

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 Disability Insurance

• 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.

Disability Overhead Insurance

• Allows business owners to cover the overhead expenses of their business while they are unable to work.

Workers Compensation Insurance

• Replaces all or part of a worker's wages lost and accompanying medical expense incurred because of a job-related injury.

Casualty Insurance

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.

Political Risk Insurance

• A form of casualty insurance that can be taken out by businesses with operations in countries in which there is a risk that revolution or other political conditions will result in a loss.

Life insurance

Life insurance provides a monetary benefit to a decedent's family or other designated beneficiary, and may specifically provide for income to an insured person's family, burial, funeral 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.

Annuities 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 policies, are financial instruments to accumulate or liquidate 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.

In U.S., the tax on interest income on life insurance policies and annuities is generally deferred. However, in some cases the benefit derived from tax deferral may be offset by a low return. This depends upon the insuring company, the type of policy and other variables (mortality, market return, etc.). Moreover, other income tax saving vehicles (e.g., IRAs, 401(k) plans, Roth IRAs) may be better alternatives for value accumulation. A combination of low-cost term life insurance and a higher-return tax-efficient retirement account may achieve better investment return.

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, flood insurance, earthquake insurance, home insurance, inland marine insurance or boiler insurance.

• Automobile Insurance

Known in the UK as motor insurance, is probably the most common form of insurance and may cover both legal liability claims against the driver and loss of or damage to the insured's vehicle itself. Throughout the United States 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.

• Driving School Insurance

Provides cover for any authorized driver whilst under going tuition, cover also unlike other motor policies provides cover for instructor liability where both the pupil and driving instructor are both equally liable in the event of a claim.

• Aviation Insurance

Insures against hull, spares, deductible, hull wear and liability risks.

• Boiler Insurance

(Also known as boiler and machinery insurance or equipment breakdown insurance) insures against accidental physical damage to equipment or machinery.

• Builder'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

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 home.

• A Fidelity Bond

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.

• Flood Insurance

Protects against property loss due to flooding. Many insurers in the US do not provide flood insurance in some portions of the country. In response to this, the federal government created the National Flood Insurance Program which serves as the insurer of last resort.

• 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

Three party insurance guaranteeing the performance of the principal.

• Terrorism Insurance

Provides protection against any loss or damage caused by terrorist activities.

• Volcano Insurance

An insurance that covers volcano damage in Hawaii.

• Windstorm Insurance

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 willful or intentional acts by the insured.

• Environmental Liability Insurance

Protects the insured from bodily injury, property damage and cleanup costs as a result of the dispersal, release or escape of pollutants.

• Professional Liability Insurance

Also called professional indemnity insurance, protects professional practitioners such as architects, lawyers, doctors, and accountants 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 Officers Liability Insurance

Protects an organization (usually a corporation) from costs associated with litigation resulting from mistakes incurred by directors and officers for which they are liable. In the industry, it is usually called "D&O" for short.

• Prize Indemnity Insurance

Protects the insured from giving away a large prize at a specific event. Examples would include offering prizes to contestants who can make a half-court shot at a basketball game, or a hole-in-one at a golf tournament.

Credit Insurance

Credit insurance repays some or all of a loan back when certain things happen to the borrower such as unemployment, disability, or death. 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.

• Mortgage insurance insures the lender against default by the borrower.

Insurance Financing Vehicles

• Protected Self-Insurance

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

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

Provided on a cooperative basis by fraternal benefit societies or other social organizations.

• Formal Self Insurance

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

A type of insurance policy (typically automobile insurance) where insureds are indemnified by their own insurer regardless of fault in the incident.

• Reinsurance

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 primary 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 mandates 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,

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.

What is an insurance policy?

An insurance policy is a contract that establishes a binding legal relationship that is regulated by both the common law and legislation. In other words, in some situations the law has been derived from precedents established in courts; in other situations the contract is specifically regulated by laws passed by Parliament. There is also regulation by independent statutory authorities.
The insurance company is known as the "insurer"; the person who holds the policy is known as the "insured".
Consumer insurance is usually either General insurance or Life insurance.

Transfer of Risk

The basis for insurance is "transfer of risk".
This means that the insurer agrees to compensate you if you suffer a loss. Without the insurance you would have to pay for that loss yourself. Obviously this contract is made on the basis that the insurance company calculates the risk that you, or the total number of people buying insurance, will cost more in payouts than what is received in premiums. This is determined by the use of statistics and the information you disclose on your application for insurance.

General Insurance

This includes:

• Home contents. It can either be "defined event" i.e. the policy covers loss or damage from a list of "defined" events, e.g. storm or fire; or "accidental loss or damage" i.e. all accidental loss with some exclusions.
• Motor vehicle. It can either be "comprehensive" i.e. it covers any damage to your car as well as damage to the other car or another person's property; "third party property" i.e. it covers damage caused by your car to another person's property. This type of insurance will not cover you for the cost of repairs to your own car; "third party fire and theft" i.e. it covers damage partly for damage caused by your car to another person's property, and restricted cover for damage to your car cause by theft or fire.
• Income protection. With this type of insurance the insurer agrees to pay you a specified amount of money, usually in monthly payments, in the event that you become disabled and unable to work. Along the same lines you an purchase "trauma insurance" to cover a medical trauma such as a heart attack.
• Public liability. States and Territories now have laws which limit an injured person's common law rights to sue for negligence, place thresholds and caps on damages for pain and suffering, and limit the payouts for economic losses.
• Personal accident.
• Travel. Make sure the policy and the underwriter will be recognised in the countries in which you travel, otherwise you may face difficulties in receiving medical assistance.
• Life insurance. This is a contract where the insurance company is bound to pay an agreed sum on the death of the person who is insured.

Some life insurance policies are more in the nature of an investment product, where the company takes your premiums and invests them to add value to the policy.

Using a broker

Under the law an insurance broker must be licensed and registered by the Australian Securities Insurance Commission. This establishes standards that ensure:

• their professional identity is truthful;
• they do not try to pressure you into a policy you don't want;
• they follow certain accounting practices that protect your premiums;
• disputes will be handled in an appropriate manner.

Types of cover

Make sure you understand the types of cover that you will receive from the policy. For instance, home insurance can either be:

• defined event i.e. the policy covers loss or damage from a list of "defined" events, e.g. storm or fire;
• accidental loss or damage i.e. all accidental loss with some exclusions.

Just because a defined event is covered in your policy is not a guarantee that you will be covered no matter how (or why) the event took place. This partly depends on the way the events are described in the policy, and any exclusions that are made in the policy regarding the circumstances of the event. Therefore it is always important to carefully read the policy. Accidental loss or damage policies cover all accidental losses, but it will nevertheless be subject to stated exclusions.