2 Definitions and types of insurance INSURANCE LAW 2 Definitions and types of insurance

INSURANCE Can be defined from viewpoint of several disciplines such as law, economics, history actuarial science, risk theory, sociology.

INSURANCE Insurance – an arrangement by which a company or the state undertakes to provide a guarantee of compensation for specified loss, damage, illness, or death in return for payment of a specified premium. /Oxford dictonary/

INSURANCE Insurance – risk-transfer mechanism that ensures full or partial financial compensation for the loss or damage caused by events beyond the control of the insured party. Under an insurance contract, a party (the insurer) indemnifies the other party (the insured) against a specified amount of loss, occuring from specified eventualities within a specified period, provided a fee called premium is paid. In general insurance, compensation is normally proportionate to the loss incurred, whereas in life insurance usually a fixed sum is paid. /businessdictionary.com/

INSURANCE Insurance – a contract whereby an insurer promises to pay the insured a sum of money or some other benefit upon the happening of one or more uncertain events in exchange for the payment of a premium. There must be uncertainty as to whether the relevant events may happen at all or, if they will occur (e.g. death) as to their timing. /Lloyd’s Glossary/

INSURANCE Insurance is the exchange of an uncertain loss of unknown magnitude for a small and known loss. /P. Zweifel and R.Eisen, Insurance Economisc/ Insurance is the exchange of money now for money payable contingent on the occurence of certain loss. /K. Arrow, Aspects of the Theory of Risk-Bearing/

INSURANCE Insurance is the pooling of fortuitous losses by transferer of such risk to insurers, who agree to indemnify insureds for such losses, to provide other pecuniary benefits on their occurence, or to render services connected with the risk. /A definition of insurance by the Commission on Insurance Terminology of the American Risk and Insurance Assocation/

Elements of insurance plan Pooling of losses Payment of fortuitous losses Risk transfer Indemnification

Pooling of losses Pooling (sharing) means spreading of losses incurred by the few over the entire group, so that in the process average loss is substituted for actual loss. Pooling involves the grouping of a large number of exposure units to provide a substantially accurate prediction of future losses. Ideally, there should be a large number of similar, but not necessarily identical, exposure units that are subject to the same perils.

Risk transfer Risk transfer means that a pure risk is transferred form the insured to the insurer, who typically is in a stronger financial position to pay the loss than the insured.

Indemnification Indemnification means that the insured is restored to his or her approximate financial position prior to the occurence of the loss.

INSURANCE A contract for transfer of risk where one entity pays a relatively small amount for a certain loss (premium) to transfer the risk of a much larger loss to another entity. It is usually charecterized by 3 elements: risk-distribution, among substuncial number of members, through an insurer engaged primarily in the business of insurance.

England – definition of insurance derived from case law A contract of insurance is any contract whereby one party assuemes the risk of an uncertain event, which is not within his control, happening at a future time in which the insured party has an interest and under which contract the first party is bound to pay money or provide its equivalent if the uncertain event occurs. It is also generally assumed that the event must be one not within the control of the assured either. It would follow that anyone who enters such contracts as the party bearing the risks, all else being equal, is carrying on insurance business for the purposes of the statute regulating insurance business.

Poland– legal definition of insurance art. 805 of Polish Civil Code § 1 By the contract of insurance the insurer undertakes within the scope of his enterprise's activity to render specified performance when an accident envisaged in the contract occurs and the insuring party undertakes to pay a premium. §2 The insurer's performance shall involve in particular a payment: in the case of property insurance - of specified damages for the damage arising due to an accident envisaged in the contract; in the case of personal insurance - of a sum of money agreed on, a pension or other performance when an accident envisaged in the contract occurs in the life of the insured party.

PUBLIC & PRIVATE INSURANCE Public insurance – governmental insurance Social insurance programs Private insurance Private insurers generally insure only pure risks. However, some pure risk are not privately insurable.

LINES OF INSURANCE Casualty Property Marine Energy Motor Aviation Reinsurance

PRIVATE INSURANCE Life insurance Health insurance Property insurance Liability insurance

LIFE INSURANCE Life insurance pays death benefits to designated beneficiaries when the insured dies.

LIFE INSURANCE Life insurance is characterized as a form of investment, whereby the policyholder makes periodic contributions to a fund that is ultimately to be paid for the support of a beneficiary other than the insured after his or her death. The loss to the beneficiary caused by the death of the insured can seldom be measured accurately in terms of cash value.

HEALTH INSURANCE Individual or group health insurance plans. Covers hospital and surgical expenses, physician fees, prescription drugs, and other medical costs.

PROPERTY INSURANCE Property insurance indemnifies property owners against the loss or damage of real or personal property caused by various perils.

PROPERTY INSURANCE Property insurance is purely a form of indemnity – restoration, dollar for dollar, as nearly as possible within policy limits, usually to the policyholder, of the value of the thing lost.

LIABILITY INSURANCE Liability insurance covers the insured’s legal liability arising out of property damage or bodily harm to others. Sometimes legal defense costs are also covered. Also called „third party” insurance, because it covers the policyholder against third party losses, i.e. losses incurred by third parties for which the policyholder is liable.

PACKAGE POLICIES Package policies combine various types of specified-risk coverage ordinarily covered by separate policies, into one comprehensive policy. From the policyholder’s perspective, all-risk insurance policies are the most attractive because they provide broader coverage and reduce the burden of proof the policyholder is typically required to prove in order to obtain coverage because the insurer has teh burden of proving the loss is excluded.

INSURABLE INTEREST Who or what may be insured and by whom. Insurable interest exists when an insured person derives a financial or other kind of benefit from the continuous existence, without impairment or damage, of the insured object (or in the case of a person, their continued survival). A person has an insurable interest in something when loss of or damage to that thing would cause the person to suffer a financial or other kind of loss. Typically, insurable interest is established by ownership, possession, or direct relationship.

INSURABLE INTEREST Poor risk Unacceptable risk Ideally insurable risk

IDEALLY INSURABLE RISK There must be a large number of exposure units. The loss must be accidental and unintentional. The loss must be determinabe and measurable. The loss should not be catastrophic. The chance of loss must be calculable (both the average frequency and the average severity of future losses). The premium must be economically feasible.

Large number of exposure units A large group of similar exposure units that are subject to the same peril or group of perils. It is to enable the insurer to predict loss based on the law of large numbers.

Accidental and unintentional loss The loss should be unforseen and unexpected by the insured and be outside of the insured’s control. If an individual deliberately causes a loss, he or she should not be indemnificated for the loss.

Determinable and measurable loss The loss should be detrminate as to cause, time, place, and amount. The basic purpose of this requirement is to determine if the loss is covered under the policy, and if it is covered, hom much should be paid.

No catastrophic loss Ideally the loss should not be catastrophic. This means that a large proportion of exposure units should not incur losses at the same time. In reality it is impossible, because catastrophic losses periodically result from floods, hurricanes, tornados, earthquakes, forest fires and other natural disasters. Catastrophic losses can also result from acts of terrorism.

Calculable chance of loss Chance of loss should be calculable. The insurer must be able to calculate both the average frequency and the average severity of future losses with some accuracy in order to calculate proper premium that is sufficient to pay all claims and expenses and yields a profit during the policy period.

Economically feasible premium Premium to be paid by the insured should be economically feasible. The insured must be able to afford the premium. For insurance to be an attractive purchase the premiums paid must be substancially less than the face value (nominal value) or amount of the policy. Total premium cannot exceed the face amount of insurance.