device for indemnifying or guaranteeing an individual against loss. Reimbursement is made from a fund to which many individuals exposed to the same risk have contributed certain specified amounts, called premiums. Payment for an individual loss, divided among many, does not fall heavily upon the actual loser. The essence of the contract of insurance, called a policy, is mutuality. The major operations of an insurance company are underwriting, the determination of which risks the insurer can take on; and rate making, the decisions regarding necessary prices for such risks. The underwriter is responsible for guarding against adverse selection, wherein there is excessive coverage of high risk candidates in proportion to the coverage of low risk candidates. In preventing adverse selection, the underwriter must consider physical, psychological, and moral hazards in relation to applicants. Physical hazards include those dangers which surround the individual or property, jeopardizing the well-being of the insured. The amount of the premium is determined by the operation of the law of averages as calculated by actuaries. By investing premium payments in a wide range of revenue-producing projects, insurance companies have become major suppliers of capital, and they rank among the nation's largest institutional investors.
Common Types of Insurance
Life insurance, originally conceived to protect a man's family when his death left them without income, has developed into a variety of policy plans. In a "whole life" policy, fixed premiums are paid throughout the insured's lifetime; this accumulated amount, augmented by compound interest, is paid to a beneficiary in a lump sum upon the insured's death; the benefit is paid even if the insured had terminated the policy. Under "universal life," the insured can vary the amount and timing of the premiums; the funds compound to create the death benefit. With "variable life," the fixed premiums are invested in a portfolio (with earning reinvested), and the death benefit is based on the performance of the investment. In "term life," coverage is for a specified time period (e.g. 5–10 years); such plans do not build up value during the term. Annuity policies, which pay the insured a yearly income after a certain age, have also been developed. In the 1990s, life insurance companies began to allow early payouts to terminally ill patients.
Fire insurance usually includes damage from lightning; other insurance against the elements includes hail, tornado, flood, and drought. Complete automobile insurance includes not only insurance against fire and theft but also compensation for damage to the car and for personal injury to the victim of an accident (liability insurance); many car owners, however, carry only partial insurance. In many states liability insurance is compulsory, and a number of states have instituted so-called no-fault insurance no-fault insurance,
type of indemnity plan, usually applied to automobile coverage, in which those injured in an accident receive direct payment from the company with which they themselves are insured.
. Click the link for more information. plans, whereby automobile accident victims receive compensation without having to initiate a liability lawsuit, except in special cases. Bonding, or fidelity insurance, is designed to protect an employer against dishonesty or default on the part of an employee. Title insurance is aimed at protecting purchasers of real estate from loss by reason of defective title. Credit insurance safeguards businesses against loss from the failure of customers to meet their obligations. Marine insurance protects shipping companies against the loss of a ship or its cargo, as well as many other items, and so-called inland marine insurance covers a vast miscellany of items, including tourist baggage, express and parcel-post packages, truck cargoes, goods in transit, and even bridges and tunnels. In recent years, the insurance industry has broadened to guard against almost any conceivable risk; companies like Lloyd's will insure a dancer's legs, a pianist's fingers, or an outdoor event against loss from rain on a specified day.
See also health insurance health insurance,
prepayment plan providing services or cash indemnities for medical care needed in times of illness or disability. It is effected by voluntary plans, either commercial or nonprofit, or by compulsory national insurance plans, usually connected with a social
. Click the link for more information. ; social welfare social welfare
or public charity,
organized provision of educational, cultural, medical, and financial assistance to the needy. Modern social welfare measures may include any of the following: the care of destitute adults; the treatment of the mentally ill; the
. Click the link for more information. ; workers' compensation workers' compensation,
payment by employers for some part of the cost of injuries, or in some cases of occupational diseases, received by employees in the course of their work.
. Click the link for more information.
The History of Insurance
The roots of insurance might be traced to Babylonia, where traders were encouraged to assume the risks of the caravan trade through loans that were repaid (with interest) only after the goods had arrived safely—a practice resembling bottomry and given legal force in the Code of Hammurabi (c.2100 B.C.). The Phoenicians and the Greeks applied a similar system to their seaborne commerce. The Romans used burial clubs as a form of life insurance, providing funeral expenses for members and later payments to the survivors.
With the growth of towns and trade in Europe, the medieval guilds undertook to protect their members from loss by fire and shipwreck, to ransom them from captivity by pirates, and to provide decent burial and support in sickness and poverty. By the middle of the 14th cent. as evidenced by the earliest known insurance contract (Genoa, 1347), marine insurance was practically universal among the maritime nations of Europe. In London, Lloyd's Coffee House (1688) was a place where merchants, shipowners, and underwriters met to transact business. By the end of the 18th cent. Lloyd's had progressed into one of the first modern insurance companies. In 1693 the astronomer Edmond Halley constructed the first mortality table, based on the statistical laws of mortality and compound interest. The table, corrected (1756) by Joseph Dodson, made it possible to scale the premium rate to age; previously the rate had been the same for all ages.
Insurance developed rapidly with the growth of British commerce in the 17th and 18th cent. Prior to the formation of corporations devoted solely to the business of writing insurance, policies were signed by a number of individuals, each of whom wrote his name and the amount of risk he was assuming underneath the insurance proposal, hence the term underwriter. The first stock companies to engage in insurance were chartered in England in 1720, and in 1735, the first insurance company in the American colonies was founded at Charleston, S.C. Fire insurance corporations were formed in New York City (1787) and in Philadelphia (1794). The Presbyterian Synod of Philadelphia sponsored (1759) the first life insurance corporation in America, for the benefit of Presbyterian ministers and their dependents. After 1840, with the decline of religious prejudice against the practice, life insurance entered a boom period. In the 1830s the practice of classifying risks was begun.
The New York fire of 1835 called attention to the need for adequate reserves to meet unexpectedly large losses; Massachusetts was the first state to require companies by law (1837) to maintain such reserves. The great Chicago fire (1871) emphasized the costly nature of fires in structurally dense modern cities. Reinsurance, whereby losses are distributed among many companies, was devised to meet such situations and is now common in other lines of insurance. The Workmen's Compensation Act of 1897 in Britain required employers to insure their employees against industrial accidents. Public liability insurance, fostered by legislation, made its appearance in the 1880s; it attained major importance with the advent of the automobile.
In the 19th cent. many friendly or benefit societies were founded to insure the life and health of their members, and many fraternal orders were created to provide low-cost, members-only insurance. Fraternal orders continue to provide insurance coverage, as do most labor organizations. Many employers sponsor group insurance policies for their employees; such policies generally include not only life insurance, but sickness and accident benefits and old-age pensions, and the employees usually contribute a certain percentage of the premium.
Since the late 19th cent. there has been a growing tendency for the state to enter the field of insurance, especially with respect to safeguarding workers against sickness and disability, either temporary or permanent, destitute old age, and unemployment (see social security social security,
government program designed to provide for the basic economic security
and welfare of individuals and their dependents. The programs classified under the term social security differ from one country to another, but all are the result of government legislation
. Click the link for more information. ). The U.S. government has also experimented with various types of crop insurance, a landmark in this field being the Federal Crop Insurance Act of 1938. In World War II the government provided life insurance for members of the armed forces; since then it has provided other forms of insurance such as pensions for veterans and for government employees.
After 1944 the supervision and regulation of insurance companies, previously an exclusive responsibility of the states, became subject to regulation by Congress under the interstate commerce clause of the U.S. Constitution. Until the 1950s, most insurance companies in the United States were restricted to providing only one type of insurance, but then legislation was passed to permit fire and casualty companies to underwrite several classes of insurance. Many firms have since expanded, many mergers have occurred, and multiple-line companies now dominate the field. In 1999, Congress repealed banking laws that had prohibited commercial banks from being in the insurance business; this measure was expected to result in expansion by major banks into the insurance arena.
In recent years insurance premiums (particularly for liability policies) have increased rapidly, leaving unprecedented numbers of Americans uninsured. Many blame the insurance conglomerates, contending that U.S. citizens are paying for bad risks made by the companies. Insurance companies place the burden of guilt on law firms and their clients, who they say have brought unreasonably large civil suits to court, a trend that has become so common in the United States that legislation has been proposed to limit lawsuit awards. Catastrophic earthquakes, hurricanes, and wildfires in late 1980s and the 90s have also strained many insurance company's reserves.
See R. I. Mehr, Principles of Insurance (1985); E. J. Vaughn, Fundamentals of Risk and Insurance (1986).
builder’s risk insurance
A specialized form of property insurance to cover work. 1 in the course of construction. Also see property insurance .
a system of measures under which a monetary (insurance) fund is established to compensate for losses or to pay other sums of money in cases of natural disasters, accidents, and other contingencies. Insurance, as K. Marx pointed out, is an economic necessity because social production needs funds to cover unusual losses caused by accidents and natural forces (see K. Marx and F. Engels, Soch. 2nd ed. vol. 24, p. 199).
Insurance developed in the Middle Ages, initially in commercial navigation, which was considered to involve many risks. Later it spread to other areas. Depending on the coverage, insurance is divided into property insurance (buildings, crops, livestock, household items, transportation) and personal insurance (life, health, disability).
In the USSR, state insurance is a new sociohistorical type of insurance, the basis for which was established by the nationalization of the insurance system. The need to nationalize insurance was substantiated by V. I. Lenin. For the first time, insurance became a state monopoly. General insurance matters are supervised by the Ministry of Finance of the USSR and the Central Administration of State Insurance, or Gosstrakh, an entity with economic accountability operating under the ministry. The Foreign State Insurance Committee, or Ingosstrakh, which operates on a joint-stock basis, conducts foreign business.
In the USSR, legislation regulates the arrangement and conditions of insurance and the types of insurance available. The Ministry of Finance of the USSR has established detailed regulations on different types of insurance. The legislations of the Union republics only deal with insurance issues that have been relegated to the jurisdiction of the republics by the legislation of the USSR.
The parties to an insurance arrangement are the insurance organization (Gosstrakh) and the insured, including kolkhozes and other cooperative and public organizations, as well as private citizens. Insurance may be obligatory, that is, the insurance contract is established exclusively by virtue of laws making the insurance obligatory, or voluntary, that is, the contract is made between the insurance organization and the insured. The insured pledges to make the specified payments to Gosstrakh, and, when covered damages occur, Gosstrakh pledges to pay the insured or some other person the insurance compensation if the policy is property insurance or the coverage if the policy is personal insurance.
A list of the property subject to obligatory insurance and to additional voluntary insurance is established by normative acts that regulate particular types of insurance. Generally, state property is not insured, and damage caused by natural disasters and other circumstances to property under the operational management of state organizations is compensated for from the state budget of the USSR. State property used by cooperative and public organizations as well as by private citizens is subject to obligatory insurance in accordance with the conditions (regulations) of its use. It may also be additionally insured at the discretion of the organizations or private citizens responsible for its preservation and maintenance. State organizations may insure property accepted for storage, sale, repair, or processing from citizens and kolkhozes and other cooperative and public organizations.
Insurance is obligatory for certain types of property belonging to kolkhozes, interkolkhoz organizations, and sovkhozes, such as crop yields, livestock, poultry, buildings, and transportation. It is also obligatory for the property belonging to private citizens, for example, for buildings and cattle. The law includes a comprehensive listing of the risks against which property is insured. The amount of insurance compensation is established by the law in advance and cannot be changed by an agreement of the parties. Other property belonging to cooperative and public organizations and to citizens is insured voluntarily.
An insurance contract must be drawn up in writing in the form of an insurance certificate, an insurance voucher, or an insurance policy issued by Gosstrakh.
The insured is obligated to pay insurance premiums to Gosstrakh, to maintain insured property in proper condition, to do everything possible to prevent the destruction of or damage to insured property, and, during and after a natural disaster or accident, to attempt to save insured property and prevent further damage to it. When a loss occurs, Gosstrakh is obligated to prepare a report on the damage incurred, to determine the amount of insurance compensation, and to pay the compensation according to an established time schedule.
Personal accident insurance is obligatory for passengers on railroads, water routes (except on suburban transit), airplanes, and public transportation (except on intraoblast transportation routes and on intrarepublic transportation routes in republics without oblast divisions). All passengers are considered insured from the moment of the call for boarding. The insurance fund for this purpose is collected during the sale of tickets and the collection of fees for the issuance of documents.
The life and health of the insured may also be covered by voluntary personal insurance. Such factors as a citizen’s age and state of health are taken into account when a personal insurance contract is prepared. There are various types of personal insurance, including mixed life insurance (including contracts with a double coverage clause), accident insurance, life insurance for loss arising out of death or disability, retirement insurance, children’s insurance, and employees’ insurance, which is paid by state, cooperative, and public organizations. A personal insurance contract may be drawn up naming a third party as beneficiary. The contract becomes effective upon the payment of the first premium. Gosstrakh pays the coverage regardless of whether or not the insured or the beneficiary receives payments from state social insurance and social security as compensation for the injury or damage suffered.
In capitalist countries property and personal insurance contracts are issued by large capitalist insurance companies. In these countries insurance is important in financing banking capital. Reinsurance is an agreement between insurance companies whereby one company undertakes to compensate another for part or all of the sum that the latter pays to its insured client. It is significant in the development of insurance and the concentration of insurance business in the hands of monopolies. A consequence of the concentration of capital, reinsurance in turn accelerates this concentration. The regulation of the insurance business by the bourgeois state is limited to the supervision by special government agencies of the establishment of the conditions of insurance and the creation, activity, and liquidation of insurance companies. Special laws on the supervision of insurance companies have been passed in most bourgeois countries.
Grazhdanskoe zakonodatel’stvo: Sbornik normativnykh aktov. Moscow, 1974. Pages 800–48.
Grazhdanskoe i torgovoe pravo kapitalisticheskikh gosudarstv. Moscow, 1966. Pages 336–49.