Principles of insurance

Losses must be uncertain.

The rate of losses must be relatively predictable: In order to set premiums (prices) insurers must be able to estimate them accurately. This is done using the Law of Large Numbers which states that: The larger the number of homogenous exposures considered, the more closely the losses reported will equal the underlying probability of loss. If the coverage is unique, the insured will pay a correspondingly higher premium. Lloyd's of London often accepts unique coverages. (e.g., the insuring of Tina Turner's legs and Jennifer Lopez's buttocks)

The loss must be significant: The legal principle of De minimis dictates that trivial matters are not covered. Furthermore, rational insurance uses existing insurance when the transaction costs dictate that filing a claim is not rational.

The loss must not be catastrophic: If the insurer is insolvent, it will be unable to pay the insured. In the United States, there is a system of Guaranty Funds run at the state level to reimburse insured people whose insurance companies have become insolvent. [1] This program is run by the National Association of Insurance Commissioners (NAIC). [2] To avoid catastrophic depletion of their own capital, insurers almost universally purchase reinsurance to protect them against excessively large accumulations of risk in a single area, and to protect them against large-scale catastrophes.

Additionally, “speculative risks” like those incurred through gambling or through the purchase of company stocks are uninsurable.

Insurance Contract Principles

A property or liability insurance policy is a "personal contract," a "conditional contract," a "unilateral contract," a "contract of adhesion," a "contract of indemnity," and a contract which requires that the person insured have an insurable interest at the time of the insured-against contingency.

Further: An Insurance Contract is one of Uberrima fides. This is a Latin phrase meaning "utmost good faith" (or translated literally, "most abundant faith"). It is name of a legal doctrine which governs insurance contracts. This means that all parties to an insurance contract must deal in good faith, making a full declaration of all material facts in the insurance proposal. This contrasts with the legal doctrine of caveat emptor (let the buyer beware).

Personal Contract

Property and liability insurance policies cover persons and not property or operations. Although the terms "insured my house" or "insured my motorcycle" are used commonly, they are not technically correct. The contract between the insurer and the insured is a personal contract between an insuring entity and a person(s) based upon their financial, "insurable interest", in the object or liability being insured. In other words, the question of whether payment is due upon the occurrence of a contingency, and how such payment will be measured, depends upon economic loss suffered by the person(s).

Conditional Contract

Property and liability insurance policies are said to be "conditional contracts" because the obligation of the insurer to perform may be conditioned upon the insured satisfying certain conditions.

Unilateral Contract

Only one party is legally bound to contractual obligations after the premium is paid to the insurer. Only the insurer has made a promise of future performance, and only the insurer can be charged with breach of contract.

Contract of Adhesion

Property and liability insurance policies are said to be "contracts of adhesion" because the insurer and insured parties are of unequal bargaining power where the insured party cannot negotiate the terms of the contract and must take the offer of the insurer as made. Importantly, the rule of law regarding "contracts of adhesion" is that any ambiguities resolve in favor of the insured.

Contract of Indemnity

Property and liability insurance policies are said to be "contracts of indemnity" because the purpose of insurance is to indemnify the insured—that is, to make good a loss that the insured has suffered. The principle of indemnification is that the insured should not profit from the policy. This does not preclude that the insured will suffer some loss. In fact, many policies include a deductible which guarantees that the insured will pay part of each loss himself.

Insurable Interest

Insurable interest is one wherein economic loss would be suffered from an adverse occurrence to the person(s) insured.

A contract of insurance is valid in law only if the insured has an insurable interest—that is, if he has a legally recognized financial relationship with the subject matter of the insurance and stands to lose out if that subject is damaged.

Indemnification

An entity seeking to transfer risk (an individual, corporation, or association of any type) becomes the 'insured' party once risk is assumed by an 'insurer', the insuring party, by means of a contract, defined as an insurance 'policy'. This legal contract sets out terms and conditions specifying the amount of coverage (compensation) to be rendered to the insured, by the insurer upon assumption of risk, in the event of a loss, and all the specific perils covered against (indemnified), for the term of the contract.

When insured parties experience a loss for a specified peril, the coverage entitles the policyholder to make a 'claim' against the insurer for the amount of loss as specified by the policy contract. The fee paid by the insured to the insurer for assuming the risk is called the 'premium'. Insurance premiums from many clients are used to fund accounts set aside for later payment of claims—in theory for a relatively few claimants—and for overhead costs. So long as an insurer maintains adequate funds set aside for anticipated losses, the remaining margin becomes their profit.

How an insurance company makes money

Profit = Earned Premium + Investment Income - Incurred Loss - Underwriting Expenses.

Insurers make money in two ways. Through underwriting, the process through which insurers select what risks to insure and decide how much premium to charge for accepting those risks and by investing the premiums they have collected from insureds.

The most difficult aspect of the insurance business is the underwriting of polices. Based on a wide assortment of data, insurers predict the likelihood that a claim will be made against their polices and price products accordingly. At the end of the policy term, the amount of premium collected minus the amount paid out in claims is the insurer's underwriting profit.

An insurer's underwriting performance is measured in their 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 underwriting profitability. A combined ratio of less than 100 percent indicates profitability, while anything over 100 indicates a loss.

One company that is famous for achieving underwriting profit is American International Group.

Berkshire Hathaway, by contrast, is famous for making its money on "float" rather than underwriting profit. “Float” describes a process by which insurers invest insurance premiums as soon as they are collected and make interest on these monies before claims must be paid out.

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.

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 US, due to natural catastrophes, have perpetuated this trend.

Determination of rate structures

The insurer uses actuarial science to quantify the risk they are willing to assume. Data is generated to approximate future claims, ordinarily with reasonable accuracy. Actuarial science uses statistics and probability to analyze the risks associated with the range of perils covered, and these scientific principles are used by insurers, in conjunction with additional factors, to determine rate structures.

For example, many individuals purchase homeowner's insurance policies by signing a contract paying a premium to an insurance company. If a covered loss occurs, the insurer is obliged by the terms of the contract to honor the insured's claim. For some policyholders, the amount of insurance benefits received from their insurer will greatly exceed the expense of premiums paid. Others may never make a claim or receive any benefit other than the peace of mind rendered by the security of an insurance policy. When averaged, the total claims expense paid by an insurer should be less than the total premiums paid by their policyholders, with the difference allocated to overhead and profit.

Insurance companies also earn investment profits. These are generated by investing premiums received until they are needed to pay claims. This money is called the 'float'. The insurer may make profits or losses from the value change in the float as well as interest or dividends on the float. 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, at the result of float. Some insurance industry insiders, most notably Hank Greenberg, 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.

Life insurance and saving

Certain life insurance contracts accumulate cash values, which may be taken by the insured if the policy is surrendered or which may be borrowed against. Some policies, such as 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, 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., interest income of life insurance policy (or annuity) is income tax deferred in general. However, its tax deferred benefit may be offset by a low return in some cases. This depends upon the insuring company, type of policy and other variables (mortality, market return, etc.). In 2000 and 2001 permanent life insurance had the second greatest investment return besides real estate. Also, other income tax saving vehicles (i.e. IRA, 401K or Roth IRA) appear to be better alternatives for value accumulation. Combination of low-cost term life insurance and higher return tax-efficient retirement account can achieve better performance.

Size of global insurance industry

Global insurance premiums grew by 9.7% in 2004 to reach $3.3 trillion. This follows 11.7% growth in the previous year. Life insurance premiums grew by 9.8% during the year due to rising demand for annuity and pension products. Non-life insurance premiums grew by 9.4% as premium rates increased. Over the past decade, global insurance premiums rose by more than a half as annual growth fluctuated between 2% and 10%.

Advanced economies account for the bulk of global insurance. With premium income of $1,217bn in 2004, North America was the most important region, followed by the EU ($1,198bn) and Japan ($492bn). The top four countries accounted for nearly two-thirds of premiums in 2004. The United States and Japan alone accounted for a half 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 10% of premiums. The volume of UK insurance business totalled $295bn in 2004 or 9.1% of global premiums. [3]

Financial viability of insurance companies

Financial stability and strength of the insurance company should be a major consideration when purchasing 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 with less attractive payouts for losses). A number of independent rating agencies, such as Best's, provide information and rate the financial viability of insurance companies.

Glossary

• 'Combined Ratio' = loss ratio + expense ratio. Loss Ratio is calculated by dividing the amount of losses by the amount of earned premium. Expense ratio is calculated by dividing the amount of operational expenses by the amount of earned premium. A lower number indicates a better return on the amount of capital placed at risk by an insurer.

Quote

• Hank Greenberg told his board of directors, "you can't even spell 'insurance'"[4] (hearsay, April 2005)

Links

• Insurance industry statistics in the world.
• Insurance industry statistics in the U.S.
• Life Insurance in the United States through World War I
• Columbia Encyclopedia: The History of Insurance
• Congressional Research Service (CRS) Reports regarding the U.S. Insurance industry
• The British Library - finding information on the insurance industry (UK bias)
• Insurance in Ancient Iran

This guide is licensed under the GNU Free Documentation License. It uses material from the Wikipedia.

Accidental death and dismemberment insurance (also known as AD&D) covers death or dismemberment as a result of an accident. In constrast to life insurance, AD&D generally would not pay survivor benefits in the case of death by illness. AD&D premiums are generally cheaper than life insurance because the incidence of death by accident is lower than death by natural causes. Dismemberment refers to the loss of two limbs or the complete loss of sight (ie: blindness), and is a rider (attached endorsement) to a policy.

Alcohol exclusion laws permit insurance companies to deny claims associated with the consumption of alcohol. They were passed in the 1940s in the United States to discourage people from drinking alcoholic beverages and to save insurance companies money from alcohol-related claims (Ensuring Solutions to Alcohol Problems, George Washington University Medical Center, 2005). It was believed that people would be less likely to drive while impaired or intoxicated if insurance companies could deny medical payments or other claims associated with any injuries associated with the consumption of alcoholic beverages. Over 30 states currently have alcohol exclusion laws.

There is to date no scientific evidence that alcohol exclusion laws discourage drunk driving. In fact, some argue that these laws discourage physicians and hospitals from testing accident victims for possible alcohol in their blood (BAC). That’s because insurance companies can refuse to pay doctors and hospitals for treating patients found to have alcohol in their bodies (Rivara, 2000). In short, screening for alcohol could lead to the loss of payments from insurance companies. Because of this, there is concern that alcohol exclusion laws help drunken drivers avoid detection and increase the likelihood that they will repeat their crime in the future (American Medical Association, 2004; Cimons, 2004; Gentilello et al, 1999). Since 2001, seven states have repealed or amended their alcohol exclusion laws and several are currently considering such action.

The insurance industry supports alcohol exclusion laws. On the other hand, the professional organization which regulates that industry, the National Association of Insurance Commissioners, has voted unanimously to recommend the repeal of alcohol exclusionary laws. Other groups supporting their repeal include the National Conference of Insurance Legislators, the American Bar Association, the American College of Emergency Physicians, Mothers Against Drunk Driving, the National Commission Against Drunk Driving, and the American Medical Association.

References

American Medical Association Advocacy Resource Center. “Supporting Repeal of the Uniform Accident and Sickness Policy Provision Law.” August 2004.

Biffl, W.L., et al. Legal prosecution of alcohol-impaired drivers admitted to a level I trauma center in Rhode Island. Journal of Trauma, 2000, 56. 24-29.

Cimons, Marlene. Challenging a Hidden Obstacle to Alcohol Treatment. Washington, DC: Ensuring Solutions to Alcohol Problems, 2004.

Ensuring Solutions to Alcohol Problems, George Washington University Medical Center. Alcohol Exclusion Law Resource Kit, 2005.

Gentilello, L.M., et al. Alcohol interventions in a trauma center as a means of reducing the risk of injury recurrence. Annals of Surgery, 1999, 230(4), 473.

Rivara, Frederick P., et al. Screening trauma patients for alcohol problems: are insurance companies barriers? Journal of Trauma, Injury, Infection and Critical Care, 2000, 48, 115.

Runge, Jeffrey W. Screening and Intervention for Alcohol Problems in the Emergency Department: Ideal Versus Reality. In: Alcohol Problems Among Emergency Department Patients: Proceedings of a Research Conference on Identification and Intervention. Washington, DC: Centers for Disease Control and Prevention, 2001.

Teitelbaum, J., et al. State laws permitting intoxication exclusions in insurance contracts: implications for public health policy and practice. Public Health Reports,2004, 119.

This article is licensed under the GNU Free Documentation License. It uses material from the Wikipedia.

Bancassurance is the term used to describe the sale of insurance products in a bank. The word is a combination of "banc" and "assurance" signifying that both banking and insurance is provided by the same corporate entity. The usage of the word picked up as banks and insurance companies merged and banks sought to provide insurance, especially in markets that have been liberalised recently. It is a controversial idea, and many feel it gives banks too great a control over the financial industry.

In some countries, bancassurance is still largely prohibited, but it was recently legalized in countries such as the United States, when the Glass-Steagall Act was repealed after the passage of the Gramm-Leach-Bliley Act.

Wealth management for High Net Worth and Ultra High Net Worth customers has been pioneered by Lombard International and the function is known as Privatbancassurance.

[1]

A  beneficiary in the broadest sense is a natural person or other legal entity who receives money or other benefits from a benefactor. The beneficiary of a life insurance policy, for example, is the person who receives the payment of the amount of insurance after the death of the insured. The beneficiaries of a trust are the persons with equitable ownership of the trust assets, although legal title is held by the trustee. The term is also used in the context of a letter of credit for the party receiving the money related thereto. Beneficiaries in other contexts are known by other names: for example, the beneficiaries of a will are called devisees or legatees according to local custom.

A series of beneficiaries may be designated in many cases to designate where the assets will go if the primary beneficiary or beneficiaries are not alive or do not qualify under the restrictions in the given contract or legal instrument. Most commonly the restriction is that the beneficiary be alive, which, if not true, allows the assets to pass to the contingent beneficiaries. Other restrictions such as being married or more creative ones can be used by a benefactor to attempt to control the behavior of the beneficiaries. Some situations such as retirement accounts do not allow any restrictions beyond death of the primary beneficiaries, but trusts allow any restrictions that are not illegal or for an illegal purpose.

The concept of a "beneficiary" will also frequently figure in contracts other than insurance policies. A third party beneficiary of a contract is a person who, although not a party to the contract, the parties intend will benefit from its provisions. A software distributor, for example, may seek provisions protecting its customers from infringement claims. A software licensor may include provisions in its agreements which protect those who provided code to that licensor.

This article is licensed under the GNU Free Documentation License. It uses material from the Wikipedia.

Captive insurance companies are limited purpose insurance companies established with the specific objective of financing risks emanating from their parent group or groups, although they sometimes also insure some of the risks of the parent company's customers. In the simplest terms, it is an in-house self-insurance vehicle. Captives usually represent commercial, economic and tax advantages to their sponsors due to the reductions on costs they help create, the ease for insurance risk management and the flexibility for cash flows they generate. Additionally, they may provide coverage of risks which are neither available nor offered in the traditional insurance market at reasonable prices, and allow the relevant group direct access to reinsurance markets.

The administration of a captive is usually, though not always, outsourced to a specialised captive manager, who is often located in an offshore jurisdiction.

Types of Captive

There are several types of insurance captive, of which the most common are defined below:

• Single Parent Captive - is an insurance or reinsurance company formed primarily to insure the risks of its non-insurance parent or affiliates.

• Association Captive - is a company owned by a trade, industry or service group for the benefit of its members.

• Group Captive - is a company, jointly owned by a number of companies, created to provide a vehicle to meet a common insurance need.

• Agency Captive - is a company owned by an insurance agency or brokerage firm so they may reinsure a portion of their clients risks through that company.

• Rent-a-Captive - is a company that provides 'captive' facilities to others for a fee, while protecting itself from losses under individual programs, which are also isolated from losses under other programs within the same company. This facility is often used for programs that are too small to justify establishing their own captive.

Two other types of insurance company which have developed recently are special purpose vehicles (SPV) and segregated portfolio companies (SPC):

• SPV - Although used extensively in the past for various financing arrangements, recently they have been used for catastrophe bond issues.

• SPC - SPCs can be formed as a rent-a-captive facility to enable those companies who lack sufficient insurance premium volume, or who are averse to establishing their own insurance subsidiary, access to many of the benefits associated with an offshore captive.

Commercial Advantages

There are a number of commercial advantages to using a captives to provide a better means of risk management than the conventional market.

• Cost. Premiums charged by commercial insurers include amounts to cover the insurer's profit margin and overheads. Such overheads can be significant when considering insurers with large corporate structures to maintain.

• Flexibility. When the market is soft, the captive can take advantage of the low rates by reinsuring a relatively large proportion of its risks. The low cost of reinsurance allows the captive to build its reserve base. When the market hardens, the captive is able to retain a larger proportion of its risks, and can maintain cover for its parent even when commercial insurance is unavailable or prohibitively expensive.

• Claims management. The process of making a claim from a third party insurer can be long and involve a good deal of cost for the claimant. Where the insurer is a captive, the claims handling procedures can be dictated by management, cutting down on the delays and bureaucracy that are often a necessary part of the claims handling procedures of commercial insurers.

• Claims experience benefits.

Captives generally retain a portion of the overall risk and reinsure the remainder. For this reason, when claims experience is better than anticipated, the excess of net premiums over claims is retained by the group. The reinsurance taken out by the captive is tailored to minimise the group's exposure where claims experience is worse than projected.

The types of risk that a captive can underwrite for the parent include property damage, public and products liability, professional indemnity, employee benefits, employers liability, motor and medical aid expenses.

Captives are becoming an increasingly important component of the risk management and risk financing strategy of their parent. A number of reasons have been put forward as the basis for the growth in the use of captives:

• heavy and increasing premium costs in almost every line of insurance coverage.
• difficulties in obtaining cover certain types of risk.
• differences in coverage in various parts of the world.
• inflexible credit rating structures which reflect market trends rather than individual loss experience.
• insufficient credit for deductibles and/or loss control efforts.

This guide is licensed under the GNU Free Documentation License. It uses material from the Wikipedia.

The cash value of an insurance policy, also called the cash surrender value or surrender value, is the amount available to the policy holder in cash upon cancellation of the policy. This term is normally used with a whole life policy in which a portion of the premiums go toward an investment. The cash value is the value of this investment at any particular time. The holder of the policy may also be able to use the cash value of the policy as collateral on a loan.

Such cash value credited to an individual account during the tenure of the policy keeps growing with every payment of premium. It also increments due to interest credited. For the insurance company, the accumulated cash value acts as a reserve and may be used to set off adverse claims and to cover bonuses in profit sharing (also called "participating") policies. Cash values also act as 'security' to insurance companies when they issue loans to insurers.

This article is licensed under the GNU Free Documentation License. It uses material from the Wikipedia.

Death spiral is a term used to describe an insurance plan whose costs are rapidly increasing as a result of changes in the covered population. It is the result of adverse selection in insurance policies where lower risk policy holders choose to change policies or be uninsured.

Links

• Death Spiral or Euthanasia? The Demise of Generous Group Health Insurance Coverage

In an insurance policy, the deductible or excess is the portion of any claim that is not covered by the insurance provider. It is normally quoted as a fixed amount and is a part of most policies covering losses to the policy holder. The deductible must be "met", that is, paid by the insured, before the benefits of the policy can apply.

In a typical automobile insurance policy, a deductible will apply to claims arising from damage to or loss of the policy holder's own vehicle, whether this damage/loss is caused by accidents for which the holder is responsible, vandalism or theft. Third-party liability coverage generally has no deductible, since the third party will likely attempt to recover any loss, however small, for which the policy holder is liable.

Most health insurance policies and some travel insurance policies have deductibles as well. Typically, a general rule is: the higher the deductible, the lower the premium, and vice versa. The type of health insurance deductibles can also vary, as individual amounts and family amounts. Major medical insurance policies are known for often having a deductible which does not cover the cost of routine visits (e.g., to a doctor's office).

This article is licensed under the GNU Free Documentation License. It uses material from the Wikipedia.

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, which makes this type of insurance useful if the entire home is destroyed, but not useful if the home is merely damaged. Rates depend on location and the probability of an earthquake. Rates may be cheaper for homes made of wood, which withstand earthquakes better than homes made of brick.

As with flood insurance or insurance on damage from a hurricane or other large-scale disasters, insurance companies must be careful when assigning this type of insurance, because an earthquake strong enough to destroy one home will probably destroy dozens of homes in the same area. If one company has written insurance policies on a large number of homes in a particular city, then a devastating earthquake will quickly drain all the company's resources. Insurance companies devote much study and effort toward risk management to avoid such cases.

California

Earthquake insurance has become a political issue in California, whose residents purchase more earthquake insurance than residents of any other state in the U.S. After the 1994 Northridge earthquake, nearly all insurance companies completely stopped writing homeowners' insurance policies altogether in the state, because under California law (the "mandatory offer law"), companies offering homeowners' insurance must also offer earthquake insurance. Eventually the legislature created a "mini policy" that could be sold by any insurer to comply with the mandatory offer law: only structural damage need be covered, with a 15% deductible. Claims on personal property losses and "loss of use" are limited. The legislature also created a quasi-public (privately funded, publicly managed) agency called the CEA California Earthquake Authority. Membership in the CEA by insurers is voluntary and member companies satisfy the mandatory offer law by selling the CEA mini policy. Premiums are paid to the insurer, and then pooled in the CEA to cover claims from homeowners with a CEA policy from member insurers. The state of California specifically states that it does not back up CEA earthquake insurance, in the event that claims from a major earthquake were to drain all CEA funds, nor will it cover claims from non-CEA insurers if they were to become insolvent due to earthquake losses. [1]

Japan

The government of Japan created the "Japanese Earthquake Reinsurance" scheme in 1966, and the scheme has been revised several times since. Homeowners may buy earthquake insurance from an insurance company, usually as an optional rider to a fire insurance policy. Insurers enrolled in the JER scheme who have to pay earthquake claims to homeowners share the risk among themselves and also the government, through the JER. The government pays a much larger proportion of the claims if a single earthquake causes aggregate damage of over about 1 trillion yen (about US $8.75 billion). The maximum payout in a single year to all JER insurance claim filers is 4.5 trillion yen (about US $39.4 billion); if claims exceed this amount, then the claims are pro-rated among all claimants.

This guide is licensed under the GNU Free Documentation License. It uses material from the Wikipedia.

Video: Hawaii Earthquake Hana Maui

An endowment mortgage is a mortgage arranged on an interest-only basis where the capital is intended to be repaid by one or more endowment policies. The phrase endowment mortgage is used mainly in the United Kingdom by lenders and consumers to refer to this arrangement and is not a legal term.

The borrower has two separate agreements. One with the lender for the mortgage and one with the insurer for the endowment policy. The arrangements are distinct and the borrower can change either arrangement if they wish. In the past the endowment policy was often taken as additional security by lender. That is, the lender applied a legal device to ensure the proceeds of the endowment were made payable to them rather than the borrower; typically the policy is assigned to the lender. This practice is uncommon now.

Why have an endowment mortgage

The customer pays only the interest on the capital borrowed, thus saving money with respect to an ordinary repayment loan; the borrower instead makes payments to an endowment policy. The objective is that the investment made through the endowment policy will be sufficient to repay the mortgage at the end of the term and possibly create a cash surplus.

Up to 1984 qualifying insurance contracts (including endowment policies) received tax relief on the premiums known as LAPR (Life Assurance Premium Relief). This gave a tax advantage for endowment mortages over repayment. Similarly MIRAS (Mortgage Interest Relief At Source) made having a larger mortgage advantageous as the MIRAS relief reduced as a repayment mortgage was repaid. This tax incentivisation toward endowment mortgages is not often commented on in the media when they discuss endowment mortgages.

Problems with endowment mortgages

The underlying premise with endowment policies being used to repay a mortgage, is that the rate of growth of the investment will exceed the rate of interest charged on the loan. Towards the end of the 1980s when endowment mortgage selling was at its peak, the anticipated growth rate for endowments policies was high (7-12% per annum). By the middle of the 1990s the change in the economy towards lower inflation made the assumptions of a few years ago look optimistic.

Regulation of investment advice in the 1994 and a growing awareness of the potential for regulatory action against the insurers lead to reduction in anticipated growth rates down to 7.5% and eventually as low as 4% per annum. By 2001 the sale of endowments to repay a mortgage was virtually seen as taboo.

Shortfalls

Financial regulations introduced compulsory reprojection letters to show existing endowment holders what the likely maturity value of their endowment would be assuming standard growth rates.

This in turn lead to a dramatic rise in complaints of mis-selling and spawned a secondary industry that 'handles' complaints for consumers for a fee, even though they can pursue it themselves for free.

In many cases insurers have found in favour of the policyholder and have been required to restore their customers to the financial position they would have been in had they taken out a repayment mortgage instead.

Endowment Mortgage Related Resources

• Information from the Financial Ombudsman Service
• FSA Endowment Mortgage Complaints

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Insurance fraud or false insurance claims are insurance claims filed with the intent to defraud an insurance provider.In the United States insurance fraud is estimated to cost US$875 per person per year with The Coalition Against Insurance Fraud estimating the loss to be $80 billion per year and Medicare estimating fraud in its system costs the government $179 billion per year. Insurance fraud hurts the average person in two ways. First, all fraud costs, including losses, investigations, etc., are paid for by the insured through higher premiums, or, in the case of government insurance like Medicare, in higher taxes. Second, if a particular individual is the target for the fraud, they have costs such as deductible payments, loss of property use, etc., as well as higher premiums from the claim loss and the potential for denial of future coverage. Some memorable examples of insurance fraud include the following:

• Former British Government minister John Stonehouse went missing in 1974 from a beach in Miami. He was discovered living under an assumed name in Australia.
• Derek Nicholson and Nikole Nagle were accused of attempting to defraud a life insurance company for $1 million after Mr Nicholson apparently went missing in New Jersey in July 2003 and Ms Nagle reported him missing and made a claim on the policy.
• Gaylan Sweet of San Diego, California, who was a claims adjuster for Allstate Insurance set up a scheme in 2002 that included non-existent children who were killed in hit-and-run auto accidents at non-existent intersections by phantom drunk drivers. Sweet and two others (who posed as the parents of the non-existent children) pocketed $710,000 before being caught by Allstate.

Links

• BBC article
• http://www.insurancefraud.org
• http://www.insurancejournal.com/news/west/2002/12/20/25075.htm

This guide is licensed under the GNU Free Documentation License. It uses material from the Wikipedia.

A fidelity bond is a form of protection 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.

While called bonds, these obligations to protect an employer from employee-dishonesty losses are really insurance policies. These insurance policies protect from losses of company monies, securities, and other property from employees who have a manifest intent to cause the company loss. There are also many other forms of crime-insurance policies (burglary, fire, general theft, computer theft, disappearance, fraud, forgery, etc.) to protect company assets.

General insurance policies, including automobile and homeowners policies, provide payments depending on the loss from a particular financial event. General insurance typically comprises any insurance that is not determined to be life insurance, and is called property and casualty insurance in the U.S..

In the UK, General insurance is broadly divided into three areas; personal lines, commercial lines and London market.

The London market insures large commercial risks, for example insuring supermarkets, football players and other very specific risks.

Commercial lines products are usually designed for relatively small legal entities. These would include workers comp (employers liability), public liability, product liability, commercial fleet and other general insurance products sold in a relatively standard fashion to many organisations.

Personal lines products are designed to be sold in large quantities. This would include autos (private car), homeowners (household), pet insurance, creditor insurance and others.

This guide is licensed under the GNU Free Documentation License. It uses material from the Wikipedia.

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

History and evolution

The concept of health insurance was proposed in 1694 by Hugh the Elder Chamberlen from the Peter Chamberlen family. In the late 19th century, early health insurance was actually disability insurance, in the sense that it covered only the cost of emergency care for injuries that could lead to a disability. This payment model continued until the start of the 21st century in some jurisdictions (like California), where all laws regulating health insurance actually referred to disability insurance. Patients were expected to pay all other health care costs out of their own pockets, under what is known as the fee-for-service business model. During the middle to late 20th century, traditional disability insurance evolved into modern health insurance programs. Today, most comprehensive private health insurance programs cover the cost of routine, preventive, and emergency health care procedures, and also most prescription drugs, but this was not always the case.

Today, issues involving health insurance are very controversial and subject to much political debate as many perceive a conflict between the needs of insurance companies to remain solvent versus the needs of their customers to remain healthy.

References

1. See California Insurance Code Section 106 (defining disability insurance).[1] In 2001, the California Legislature added subdivision (b), which defines "health insurance" as "an individual or group disability insurance policy that provides coverage for hospital, medical, or surgical benefits."

Links

• Health insurance data from the US census
• History of Health Insurance in the United States
• Health Insurance and the acceptance of Alternative Medicine
• Maryland Health Insurance Resource
• Public's expectation from Health Insurance

This guide is licensed under the GNU Free Documentation License. It uses material from the Wikipedia.

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Indemnity is a legal exemption from the penalties or liabilities incurred by any course of action. For example, after wars, the losers have sometimes been required to pay indemnities. An insurance payout is often called an indemnity, or it can be insurance to avoid paying expenses in case of a lawsuit.

In pre-biblical times, most societies allowed for non-equal indemnity; a person who was only injured was often allowed to kill the person responsible in revenge. This was true of many near-eastern and middle-eastern societies. In some cultures, the standard has been like-for-like recompense, as in "an eye for an eye".

An innovation occurred with the development of the Hebrew Bible ("Old Testament"), which put limits on indemnities; in the Biblical view, a maximum limit was applied with the phrase "an eye for an eye, a tooth for a tooth." In later centuries this was anachronistically read by non-Jews as a promotion of equal physical indeminity, while many Jews and Bible scholars hold that in its original context its function was to limit such actions.

Indemnification is a promise, usually as a contract provision, protecting one party from financial loss. This is sometimes stated as a requirement that one party "hold harmless" the other. Indemnification is a type of insurance, which protects one party at the expense of the other. Indemnification can either by direct payment or reimbursement for the loss. Indemnification clauses cannot usually be enforced for intentional tortious conduct of the protected party.

Corporate officers, board members and public officials often require an indemnity clause in their contracts before they perform any work.

In addition, indemnification provisions are common in intellectual property licenses in which the licensor does not want to be liable for misdeeds of the licensee. A typical license would protect the licensor against product liability and patent infringement.

Comment: "hold harmless" does not imply indemnification. The first says I won't make a claim against you; the second says I will pay off claims against you and/or your costs, etc.

Freeing of slaves and servants

Slaveowners are said to suffer a loss whenever their slaves or servants are granted their freedom. A tacit belief exists that harm is caused to slaveowners whenever slaves or servants are released. Slaveowners may be paid to cover their losses.

When the slaves of Zanzibar were freed in 1897, it was by compensation since the prevailing opinion was that the slaveowners suffered the loss of an asset whenever a slave was freed.

In the 1860s in the United States, U.S. President Abraham Lincoln had requested many millions of dollars from Congress with which to pay slaveowners "for the loss of their property." On July 9th, 1868, part #4 of the Fourteenth Constitutional Amendment dismissed all of the claims that slaveowners had been injured by the freeing of the slaves.

In 1807-08, in Prussia, statesman Baron Heinrich vom Stein introduced a series of reforms, the principal of which was the abolition of serfdom with indemnification to territorial lords.

Haiti was required to pay an indemnity of 150,000,000 francs to France in order to atone for the loss suffered by the French slaveowners.

Costs of war

The nation that wins a war may insist on being paid compensations for the costs of the war, even after having been the creator of the war.

• Following the Sino-Japanese War of 1894-95, the Treaty of Shimonoseki required that China pay Japan the sum of 200,000,000 taels (or liangs).
• China incurred an indemnity which resulted from massacres of foreigners during the Boxer Rebellion. The payment of 450,000,000 Haikwan taels, or $330,000,000 became necessary.

Indemnity in Unification Church belief

In the Unification Church, indemnity is a theological term involved in the absolution of sin. Usually, a sinner may pay 'lesser indemnity' by performing an act of contrition. A secular counterpart to lesser indemnity would be if a child broke a neighbor's window, and the neighbor accepted the child's apology as settling the matter.

The Unification Church believes that on a few occasions God required 'greater indemnity', as when he required the Israelites to wander 40 years in the desert after 10 of the 12 spies sent to Canaan reported faithlessly, "a year for every day". "After the number of the days in which ye searched the land, even forty days, each day for a year, shall ye bear your iniquities, even forty years, and ye shall know my breach of promise," Numbers 13:34.

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Video: Double Indemnity - Trailer (1944)

There is no legal definition for Keyman Insurance. In general, it can be described as an insurance policy taken out by a business to compensate that business for financial losses that would arise from the death or extended incapacity of the member of the business specified on the policy. The policy’s term does not extend beyond the period of the key person’s usefulness to the business. The aim is to compensate the business for losses and facilitate business continuity. Keyman Insurance does not indemnify the actual losses incurred but compensates with a fixed monetary sum as specified on the insurance policy.

Insurable losses

There are four categories of loss for which Keyman Insurance can provide compensation:

1. Losses related to the extended period when a key person is unable to work, to provide temporary personnel and, if necessary to finance the recruitment and training of a replacement.
2. Insurance to protect profits. For example, offsetting lost income from lost sales, losses resulting from the delay or cancellation of any business project that the key person was involved in, loss of opportunity to expand, loss of specialized skills or knowledge.
3. Insurance to protect shareholders or partnership interests. Typically this is insurance to enable shareholdings or partnership interests to be purchased by existing shareholders or partners.
4. Insurance for anyone involved in guaranteeing businesses loans or banking facilities. The value of insurance cover is arranged to equal the value of the guarantee given by the key person.

Who can be a Keyman?

A Keyman can be anyone directly associated with the business whose loss can cause financial strain to the business. For example, they could be: a Director of a company, a Partner, key sales people, key project managers and people with specific skills or knowledge which is especially valuable to the company.

Taxation

The tax treatment for premiums paid for Keyman Insurance and the treatment of monies received from a claim vary between countries.

Links

• Valuing the key person
• Keyman Insurance – insures some of your biggest business risks.

This guide is licensed under the GNU Free Documentation License. It uses material from the Wikipedia.

Video: Key Man Life Insurance

Lenders Mortgage Insurance (LMI), also known as Private Mortgage Insurance (PMI), is insurance payable to a lender when taking out a mortgage. It is an insurance in the case that the mortgagor is not able to repay the loan, and the lender is not able to recover its costs after foreclosing the loan and selling the mortgaged property.

The LMI may be payable up front, or it may be capitalized onto the loan. This type of insurance is usually only charged if the downpayment is less than 20% of the sales price or appraised value (in other words, the LTV or loan to value ratio should be 80% or less). Once the principal reaches 80%, the LMI is no longer required. Cancelling mortgage insurance can be a difficult process. Sometimes lenders will require that LMI be paid for a fixed period, even if the principal reaches 80%. The cancellation request must come from the Servicer of the mortgage to the PMI company who issued the insurance. Often times the Servicer will require a new appraisal to determine the LTV. The cost of mortgage insurance varies considerably based on several factors which include: loan amount, LTV, occupancy (primary, second home, investment property), documentation provided at loan origination, and most of all, credit score.

If a borrower has less than the 20% downpayment needed to avoid a mortgage insurance requirement, they might be able to make use of a second mortgage (sometimes referred to as a "piggy-back loan") to make up the difference . Two popular versions of this lending technique are the so-called 80/10/10 and 80/15/5 arrangements. Both involve obtaining a primary mortgage for 80% LTV. An 80/10/10 program uses a 10% LTV second mortgage with a 10% downpayment, and an 80/15/5 program uses a 15% LTV second mortgage with a 5% downpayment. Other combinations of second mortgage and downpayment amounts might also be available. One advantage of using these arrangements is that under United States tax law, mortgage interest payments may be deductible on the borrower's income taxes, whereas mortgage insurance premiums are not. As such, even though the additional cost of a higher interest rate second mortgage might be similar to the cost of mortgage insurance, the borrower may see a reduction in total costs when the tax benefits are considered.

Links

• What is 80-10-10 Financing?
• Buying a home with no little down
• California Bad Credit Lenders
• Avoiding PMI

This guide is licensed under the GNU Free Documentation License. It uses material from the Wikipedia.

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A managing general agent (MGA) is a person or firm authorized by an insurer to transact insurance business who may have authority to bind the insurer, issue policies, appoint producers, adjust claims and provide administrative support for the types of insurance coverage pursuant to an agency agreement.

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A Net Premium Valuation is an actuarial calculation, used to place a value on the liabilities of a life insurer.

Background

It involves calculating a present value for the contractual liabilities of a contract, and deducting the value of future premiums. Both contractual liabilities, and future premiums in this calculation allow only for mortality and interest. The key with a new premium valuation is that the premiums being valued are theoretical measures - they make no reference to the actual premiums being charged by the insurer.

This technique is a well established actuarial valuation method, that became popular because of its simplicity, consistency, and ease of calculation.

New Methods

With the advent of computers, the more complicated so-called Gross Premium Valuation calculation (which is also more realistic than the Net Premium Valuation) has become much more feasible, and is displacing the archaic Net Premium Valuation further from its historical position of prominence.

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Protection and indemnity insurance, commonly known as "P&I", is marine insurance against third party liabilities and expenses arising from owning ships or operating ships as principals. It is distinct from other forms of marine insurance purchased by shipowners such as hull insurance and war risk insurance.

Growth of third party liabilities

Although marine insurance dates from the Middle Ages, British shipowners did not feel the need to purchase liability insurance until the 19th century when injured crew members began to seek compensation from their employers, and Lord Campbell's Act of 1846 facilitated claims by passengers or their survivors. The likelihood of claims was greatly increased by the vast numbers of passengers who constituted the flood of emigrants to North America and Australia in the second half of the century. Shipowners were also becoming increasingly aware of the inadequacy of the available insurance cover in respect of damage caused by their ships in collisions with other ships. The usual cover for claims by other ships and their cargo for collision damage excluded altogether one fourth of such damage and, more seriously, was limited in amount. (The maximum recovery under hull policies, including both damage to the insured ship and liability for the damage it had caused, was the insured value of the ship).

The first protection association, the Shipowners' Mutual Protection Society, was formed in 1855. It was intended to cover liabilities for loss of life and personal injury and also the collision risks excluded from the current marine policies, particularly the excess above the limits in those policies. Similar associations were subsequently formed in various cities and towns within the United Kingdom, and later in Scandinavia, Japan, and the United States.

In 1874 the risk of liability for loss of or damage to cargo carried on board the insured ship was first added to the cover provided by a protection Club. The values of cargoes had risen and cargo underwriters, encouraged by the courts, had become keener on recovering their losses from shipowners. After 1874 many Clubs added an indemnity class to provide the necessary cover. Subsequently, most of these separate classes were amalgamated with the class reserved for the original protection risks, and the distinction between the two classes virtually disappeared.

Following the grounding of the Torrey Canyon in 1967, coverage for the liabilities, costs and expenses arising from oil spills became an increasingly important aspect of P&I insurance.

Coverage today

More than 90% of oceangoing ships today are insured by the mutual P&I Clubs that are members of the International Group of P&I Clubs, [1]. These organizations are the successors of the associations founded in the 19th and early 20th centuries. P&I Club coverage is generally as broad as the liabilities faced by a shipowner qua shipowner. The following are the major exceptions to this rule.

Other insurance

Traditionally, one of the main reasons a claim was not covered by P&I insurance was that the managers of the Club thought it should be covered by other insurance that the shipowner should have taken out. That usually meant hull insurance, which paid collision liabilities and, in some cases, liabilities for damage to fixed and floating objects ("FFO"), or war risks insurance.

Mutuality

Another reason a claim might not be covered, or at least not covered in full, is that the shipowner had not taken certain steps to have limited his liability in order to protect the Club. The principal steps expected of shipowners were making sure that the appropriate exculpatory language was inserted in bills of lading and passenger tickets. Today the legal requirements with which shipowners are expected to comply include all the requirements of the flag state concerning marine safety and environmental protection. Another illustration of this principle is the rule that contractual liabilities (those assumed by the shipowner as a matter of contract) are not generally covered.

Moral hazard

P&I Clubs have always taken pains to point out to members that liabilities arising out of the fraudulent misdelivery of cargo, especially delivery of cargo without demanding the production of an original bill of lading, were not covered by P&I insurance. Club managers evidently thought that commerce would grind to a halt if there was a risk that shipowners would conspire with shippers to defraud receivers and their banks, so they refused to indemnify shipowners under these circumstances. This view was shared by the English courts. Sze Hai Tong Bank v. Rambler Cycle Co. [1959] A.C. 576; [1959] 2 Lloyd's Rep. 114 (P.C.)

Wilful misconduct

Losses intended by the insured, or to which it "turned a blind eye" knowing they were likely to happen.

Public policy

There was a time when criminal liabilities were not covered as a matter of course. To say otherwise might even make the underwriter liable for facilitating the crime. It was understood that criminal liability was imposed only for intentional misconduct, and the requirement of fortuity generally foreclosed any question of coverage for criminal liabilities. Today, the situation is vastly more difficult. Statutes in many countries impose "criminal" liability for negligent conduct that damages the environment, under circumstances which do not even rise to the level of "wilful misconduct" under the law of marine insurance. Shipowners justifiably expect their Clubs to pay the fines and penalties thus incurred.

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The RAND Health Insurance Experiment (RAND HIE) was a comprehensive study of health care cost, utilization and outcome in the United States. It is the only randomized study of health insurance, and the only study which can give definitive evidence as to the causal effects of different health insurance plans. Most health economics studies are observational, and can only give associational evidence. Although the study was conducted in the 1970's and early 1980's, the results are still highly relevant, since RAND HIE is the only study which can make causal statements.

In 1971, a RAND group, led by health economist Joe Newhouse and including statistician Carl Morris, established an insurance company using funding from the then-United States Department of Health, Education, and Welfare. The company insured 5809 people, randomly assigned to insurance plans that either had no cost-sharing, 25, 50 or 95% copayment rates with a maximum annual payment of $1000.

The study found higher copayment rates reduced spending because people did not seek care as frequently; the care which was not consumed by the higher cost-sharing group was equally necessary and unnecessary care. In the general study group, there was no measurable difference in health states between the groups, but for subgroups such as the chronically ill, chronic illnesses such as diabetes and high blood pressure were not as well controlled among the high cost-sharing group than among the low cost-sharing groups.

The study opened the way for increased cost-sharing for medical care in the 1980's and 1990's.

See _Free for All_ by Joe Newhouse and the RAND Health Insurance Experiment group for the full details of the study, design, results, and discussion. It is a well-written book.

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Segregated Fund are a classification of funds administered by an insurance company in the form of individual, variable life insurance contracts offering certain guarantees to the policyholder such as reimbursement of capital upon death.

As required by law, these funds are fully segregated from the company's general investment funds, hence the eponym.

Term life insurance is the original form of life insurance and is considered to be pure insurance protection because it builds no cash value. This is in contrast to permanent life insurance such as whole life, universal life, and variable universal life.

Term life insurance is temporary, as it covers only a specific period of time, the relevant term. If the insured dies during the term, the death benefit will be paid to the beneficiary. Because the term expires the insurer often does not have to pay out making term insurance the most inexpensive way to purchase a substantial death benefit on a coverage per premium dollar basis.

Concepts

Usage

Because term insurance is temporary in nature its primary use is generally to provide for covering temporary financial responsibilities of the insured. Such responsibilites may include but are not limited to consumer debt, dependent care, college education for dependents, and mortgages.

Annual renewable term

The simplest form of term life insurance is for a term of one year. The death benefit would be paid by the insurance company if the insured died during the one year term, while no benefit is paid if the insured dies one day after the last day of the one year term. The premium paid is then just the expected probability of the insured dying in that one year plus a cost and profit component for the insurer. Since the likelihood of dying in the next year is low for anyone that the insurer would accept for the coverage, purchasing one year of coverage is not generally done, nor cost effective. The main problem with this type of coverage is that the insured could acquire a terminal illness within the year, but not die until after the term expires. Because of the terminal illness, the purchaser would likely be uninsurable after the expiration of the initial term, and would be unable to purchase a new policy. A variant that is commonly purchased is annual renewable term (ART). In this form, the premium is paid for one year of coverage, but the policy is guaranteed to be able to be continued each year for a given period of years. This period varies from 10 to 30 years, or occasionally until age 95. As the insured ages the premiums increase accordingly and later becomes financially unviable as the rates for a policy would eventually approach the face amount. In this form the premium is slightly higher than for a single year's coverage, but is much more likely for the insured to have the benefit paid.

Level term

Much more common than annual renewable term insurance is insurance where the premium is the same for a given period of years. The most common periods being 10, 15, 20, and 30 years. In this form, the premium paid each year is the same, and is the cost of each year's annual renewable term rates averaged over the term, with a time value of money adjustment made by the insurer. Thus the longer the term the premium is level for, the higher the premium, because the older, more expensive to insure years are averaged into the premium.

Most level term programs include a renewal option and allow the insured to renew for a maximum guaranteed rate if the insured period needs to be extended. This would be used if the health of the insured deteriorates significantly during the term.

Payout likelihood

Term offers coverage will pay a death benefit which is usually income tax free, as long as the policy is in force and premiums are current (Death benefits of both Term and Permanent coverage are usually income tax free).

Insurance industry studies show that it is very unlikely that the death benefit will ever be paid on a term insurance policy. One study placed the percentage as low as 1% of policies paying a benefit. That is the reason term insurance is able to be so inexpensive. The low payout percentage is a combination of there being a low likelihood (in the aggregate) of a random, healthy person dying within a short period of time. Because of this low likelihood of an insurer having to pay a death benefit, term insurance is by far the most inexpensive way to purchase a death benefit on a coverage per premium dollar basis.

Permanent life insurance offers coverage for the entire life of the insured and therefore will pay a death benefit which is usually income tax free, as long as premiums are current or there is enough cash value to cover the premiums in some cases. This high payout likelihood, though, increases the cost per premium dollar substantially. Permanent coverage allows certain tax advantages, including tax deferred growth of cash value. This tax deferred growth is similar to that of a Roth IRA, however, if the policy is canceled any cash value growth above premium payments is taxable.

Conversion privileges

Some people may need to take advantage of the benefits offered by permanent programs, but may not be able to attain the proper coverage or higher premiums, many term policies offer a conversion privilege for a certain period of years, allowing the insured to convert to a permanent policy regardless of health condition at the time of conversion. In this way a person can obtain the necessary coverage for a young family, for instance by purchasing the inexpensive term insurance, but be able to utilize the benefits of a permanent policy as cash flows increase or as coverage needs decrease.

Conversion generally allows the policy holder to convert a term program to a permanent program with an equal or lesser death benefit without proof of insurability.

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Uberrima fides is a Latin phrase meaning "utmost good faith" (or translated literally, "most abundant faith"). It is name of a legal doctrine which governs insurance contracts. This means that all parties to an insurance contract must deal in good faith, making a full declaration of all material facts in the insurance proposal. This contrasts with the legal doctrine of caveat emptor (let the buyer beware).

Thus the assured must reveal the exact nature and potential of the risks that he transfers to the insurer, while at the same time the insurer must make sure that the potential contract fits the needs of, and benefits, the assured.

Links

• Uberrima Fides And Concealment in the Marine Policy Application from the Maritime Law Association of the United States

This article is licensed under the GNU Free Documentation License. It uses material from the Wikipedia.

Value of In-Force is a life insurance term for the present value of the profits that will emerge from a block of life insurance policies over time.

Whole life insurance requires a level premium for life, and guarantees a minimum cash value growth included in the policy.

Types

There are two general types of whole life policies: non participating policies (non par), and participating policies.

Non Participating

All values related to the policy (death benefits, cash surrender values, premiums) are determined at policy issue, for the life of the contract, and cannot be altered after issue.

This means that the insurance company assumes all risk of future performance versus the actuaries' estimates. If future claims are underestimated, the insurance company makes up the difference. On the other hand, if the actuaries' estimates on future death claims are high, the insurance company will retain the difference.

Participating

With a participating policy, the insurance company shares the excess profits (dividends) with the policyholder. The greater the success of the companies performance, the greater the dividend.

Requirements

Whole life insurance typically requires that the owner pay premiums for the life of the policy. There are some arrangements that let the policy be "paid up", which means that no further payments are ever required, in as few as 5 years, or with even a single large premium. Typically if the payor doesn't make a large premium payment at the outset of the life insurance contract, then he is not allowed to begin making them later in the contract life. In contrast, Universal life insurance generally allows more flexibility in premium payment.

Guarantees

The company generally will guarantee that the policy's cash values will increase regardless of the performance of the company or its experience with death claims (again compared to universal life insurance and variable universal life insurance which can increase the costs and decrease the cash values of the policy.)

Liquidity

Cash values are considered liquid enough to be used for investment capital, but only if the owner is financially healthy enough to continue making premium payments. Cash value access is tax free up to the point of total premiums paid, and the rest may be accessed tax free in the form of policy loans. If the policy lapses, taxes would be due on outstanding loans.

Performance

Internal rates of return for participating policies may be much better than universal life and interest sensitive whole life because their cash values are invested in the money market and bonds, while par whole life cash values are invested in the life insurance company and its general account, which may be in real estate and the stock market. Variable universal life insurance may outperform whole life because the owner can direct investments in sub-accounts that may do better. If an owner desires a conservative position for his cash values, par whole life is indicated.

Summary

The primary advantages of whole life are guaranteed death benefit, guaranteed cash values, fixed and known annual premiums, access to cash values, and the fact that 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 on a tax free basis.

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

Actuarial science includes a number of interrelating disciplines, including probability and statistics, finance, and economics. Historically, actuarial science used deterministic models in the construction of tables and premiums. The science has gone through revolutionary changes during the last 30 years due to the proliferation of high speed computers and the synergy of stochastic actuarial models with modern financial theory (Frees 1990).

In traditional life insurance, actuarial science focuses on the analysis of mortality, the production of life tables, and the application of compound interest to produce life insurance, annuities and endowment policies. Contempory life insurance programs have been extended to include credit and morgage insurance, key man insurance for small businesses, long term care insurance and medical savings accounts (Hsiao 2001).

In health insurance and corporate benefit programs in the USA, and social insurance, actuarial science focuses on the analyses of rates of disability, morbidity, mortality, fertility and other contingencies. The effects of the geographical distribution of the utilization of medical services and procedures, and the utilization of drugs and therapies, is also of great importance. These factors underly the development of the Resource-Base Relative Value Scale (RBRVS) at Harvard in a multi-disciplined study. (Hsiao 1988) Actuarial science also aids in the design of benefit structures, reimbursement standards, and the effects of proposed governemnt standards on the cost of healthcare (cf. CHBRP 2004).

In the pension industry, actuarial methods are used to measure the costs of alternative strategies with regard to the design, maintenance or redesign of pension plans. The strategies are greatly influenced by collective bargaining; the employer's old, new and foreign competitors; the changing demographics of the workforce; changes in the internal revenue code; changes in the attitude of the internal revenue service regarding the calculation of surpluses; and equally importantly, both the short and long term financial and economic trends. It is common with mergers and acquisitions that several pension plans have to be combined or at least administered on an equitable basis. When benefit changes occur, old and new benefit plans have to be blended, satisfying the demands of political correctness and various government discrimination test calculations, and providing employees and retirees with understandle choices and transition paths. Benefit plans liabilities have to be properly valued, reflecting both earned benefits for past service, and the benefits for future service. Finally, funding schemes have to be developed that are manageable and satify the Financial Accounting Standards Board (FASB).

In social welfare programs, the Office of the Chief Actuary (OCACT), Social Security Administration plans and directs a program of actuarial estimates and analyses relating to SSA-administered retirement, survivors and disability insurance programs and to proposed changes in those programs. It evaluates operations of the Federal Old-Age and Survivors Insurance Trust Fund and the Federal Disability Insurance Trust Fund, conducts studies of program financing, performs actuarial and demographic research on social insurance and related program issues involving mortality, morbidity, utilization, retirement, disability, survivorship, marriage, unemployment, poverty, old age, families with children, etc., and projects future workloads. In addition, the Office is charged with conducting cost analyses relating to the Supplemental Security Income (SSI) program, a general-revenue financed, means-tested program for low-income aged, blind and disabled people. The Office provides technical and consultative services to the Commissioner, to the Board of Trustees of the Social Security Trust Funds, and its staff appears before Congressional Committees to provide expert testimony on the actuarial aspects of Social Security issues.

In the property and casulaty insurance fields, which protect against losses like those caused by hurricanes as well as automobile accidents, actuarial science tries to forecast aggregate losses to persons and property.

In reinsurance, actuarial science attempts to predict the behavior of large blocks of policies affecting a particular cedant company. This can be very different from cedant to cedant, as it depends strongly on the insureds claims handling and underwriting abilities.

Many universities have undergraduate and graduate degree programs in actuarial science.

Bibliography

• Charles L. Trowbridge (1989). "Fundamental Concepts of Actuarial Science" (PDF). Revised Edition. Actuarial Education and Research Fund. Retrieved on 2006-06-28.

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