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Insurance Handbook A guide to insurance: what it does and how it works
The insurance industry safeguards the assets of its policyholders by transferring
risk from an individual or business to an insurance company. Insurance companies act as financial intermediaries in that they invest the premiums they collect
for providing this service. Insurance company size is usually measured by net
premiums written, that is, premium revenues less amounts paid for reinsurance.
There are three main insurance sectors: property/casualty, life/health and health
insurance. Property/casualty (P/C) consists mainly of auto, home and commercial insurance. Life/health (L/H) consists mainly of life insurance and annuity products. Health insurance is offered by private health insurance companies and some L/H and P/C insurers, as well as by government programs such as.
All types of insurance are regulated by the states, with each state having its
own set of statutes and rules. State insurance departments oversee insurer solvency, market conduct and, to a greater or lesser degree, review and rule on
requests for rate increases for coverage. The National Association of Insurance
Commissioners develops model rules and regulations for the industry, many
of which must be approved by state legislatures. The McCarran-Ferguson Act,
passed by Congress in 1945, refers to continued state regulation of the insurance
industry as being in the public interest. Under the 1999 Gramm-Leach-Bliley
Financial Services Modernization Act, insurance activities—whether conducted
by banks, broker-dealers or insurers—are regulated by the states. However, there
have been, and continue to be, challenges to state regulation from some segments of the federal government as well as from some financial services firms.
Insurers are required to use statutory accounting principles (SAP) when filing
annual financial reports with state regulators and the Internal Revenue Service. SAP,
which evolved to enhance the industry’s financial stability, is more conservative
than the generally accepted accounting principles (GAAP), established by the independent Financial Accounting Standards Board (FASB). The Securities and Exchange
Commission (SEC) requires publicly owned companies to report their financial
results using GAAP rules. Insurers outside the United States use standards that differ from SAP and GAAP. As global markets developed, the need for more uniform
accounting standards became clear. In 2001 the International Accounting Standards
Board (IASB), an independent international accounting standards setting organization, began work on a set of standards, called International Financial Reporting
Standards (IFRS) that it hopes will be used around the world. Since 2001 over 100
countries have required or permitted the use of IFRS.
In 2007 the SEC voted to stop requiring non-U.S. companies that use IFRS
to re-issue their financial reports for U.S. investors using GAAP. In 2008 the
National Association of Insurance Commissioners began to explore ways to
move from statutory accounting principles to IFRS. Also in 2008, the FASB and
IASB undertook a joint project to develop a common and improved framework
for financial reporting
Property/casualty and life insurance policies were once sold almost exclusively
by agents—either by captive agents, representing one insurance company, or
by independent agents, representing several companies. Insurance companies
selling through captive agents and/or by mail, telephone or via the Internet
are called “direct writers.” However, the distinctions between direct writers and
independent agency companies have been blurring since the 1990s, when insurers began to use multiple channels to reach potential customers. In addition, in
the 1980s banks began to explore the possibility of selling insurance through
independent agents, usually buying agencies for that purpose. Other distribution channels include sales through professional organizations and through
Auto Insurance Basics
Auto insurance protects against financial loss in the event of an accident. It is a
contract between the policyholder and the insurance company. The policyholder agrees to pay the premium and the insurance company agrees to pay losses as defined in the policy. Auto insurance provides property, liability and medical coverage:Property coverage pays for damage to, or theft of, the car. Liability coverage pays for the policyholder’s legal responsibility to
others for bodily injury or property damage. Medical coverage pays for the cost of treating injuries, rehabilitation and sometimes lost wages and funeral expenses. Most states require drivers to have auto liability insurance before they can legally drive a car. (Liability insurance pays the other driver’s medical, car repair and other costs when the policyholder is at fault in an auto accident.) All states have laws that set the minimum amounts of insurance or other financial security drivers have to pay for the harm caused by their negligence behind the wheel if
an accident occurs. Most auto policies are for six months to a year. A basic auto insurance policy is comprised of six different kinds of coverage, each of which is priced separately (see below).
- Bodily Injury Liability
This coverage applies to injuries that the policyholder and family members listed on the policy cause to someone else. These individuals are also covered when
driving other peoples’ cars with permission. As motorists in serious accidents
may be sued for large amounts, drivers can opt to buy more than the staterequired minimum to protect personal assets such as homes and savings.
- Medical Payments or Personal Injury Protection (PIP)
This coverage pays for the treatment of injuries to the driver and passengers
of the policyholder’s car. At its broadest, PIP can cover medical payments,
lost wages and the cost of replacing services normally performed by someone
injured in an auto accident. It may also cover funeral costs.
- Property Damage Liability
This coverage pays for damage policyholders (or someone driving the car with
their permission) may cause to someone else’s property. Usually, this means
damage to someone else’s car, but it also includes damage to lamp posts, telephone poles, fences, buildings or other structures hit in an accident.
This coverage pays for damage to the policyholder’s car resulting from a collision with another car, an object or as a result of flipping over. It also covers
damage caused by potholes. Collision coverage is generally sold with a deductible of $250 to $1,000—the higher the deductible, the lower the premium. Even
if policyholders are at fault for an accident, collision coverage will reimburse
them for the costs of repairing the car, minus the deductible. If the policyholder
is not at fault, the insurance company may try to recover the amount it paid
from the other driver’s insurance company, a process known as subrogation. If
the company is successful, policyholders will also be reimbursed for the deductible.
This coverage reimburses for loss due to theft or damage caused by something
other than a collision with another car or object, such as fire, falling objects,
missiles, explosions, earthquakes, windstorms, hail, flood, vandalism and riots,
or contact with animals such as birds or deer. Comprehensive insurance is usually sold with a $100 to $300 deductible, though policyholders may opt for a
higher deductible as a way of lowering their premium. Comprehensive insurance may also reimburse the policyholder if a windshield is cracked or shattered.
Some companies offer separate glass coverage with or without a deductible.
States do not require the purchase of collision or comprehensive coverage, but
lenders may insist borrowers carry it until a car loan is paid off. It may also be a
requirement of some dealerships if a car is leased.
- Uninsured and Underinsured Motorist Coverage
Uninsured motorist coverage will reimburse the policyholder, a member of the
family or a designated driver if one of them is hit by an uninsured or a hit-and run driver. Underinsured motorist coverage comes into play when an at-fault
driver has insufficient insurance to pay for the other driver’s total loss. This coverage will also protect a policyholder who is hit while a pedestrian.
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