Insurance or assurance, 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 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.
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 BC). 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. 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.
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