Types of insurance

Types

• Life, Health, and Variable Annuities
  • Health (dental, vision, medications)
  • Life (long-term care, accidental death and dismemberment, hospital indemnity)
  • Annuities (securities)
  • Life and Annuities
• Property and Casualty (P n C)
  • Property (flood, earthquake, home, auto, fire, boiler, title, pet)
  • Casualty (errors and omissions, workers' compensation, disability, liability)
• Reinsurance

Risk limiting features

An insurance policy should not contain provisions that allow one side or the other to unilaterally void the contract in exchange for benefit. Provisions that void the contract for failure to perform or for fraud or material misrepresentation are ordinary and acceptable.
The policy should have a term of not more than about three years. This is not a hard and fast rule. Contracts of over five years duration are classified as ‘long-term,’ which can impact the accounting treatment, and can obviously introduce the possibility that over the entire term of the contract, no actual risk will transfer. The coverage provided by the contract need not cease at the end of the term (e.g., the contract can cover occurrences as opposed to claims made or claims paid).
The contract should be considered to include any other agreements, written or oral, that confer rights, create obligations, or create benefits on the part of either or both parties. Ideally, the contract should contain an ‘Entire Agreement’ clause that assures there are no undisclosed written or oral side agreements that confer rights, create obligations, or create benefits on the part of either or both parties. If such rights, obligations or benefits exist, they must be factored into the tests of reasonableness and significance.
The contract should not contain arbitrary limitations on timing of payments. Provisions that assure both parties of time to properly present and consider claims are acceptable provided they are commercially reasonable and customary.
Provisions that expressly create actual or notional accounts that accrue actual or notional interest suggest that the contract contains, in fact, a deposit.
Provisions for additional or return premium do not, in and of themselves, render a contract something other than insurance. However, it should be unlikely that either a return or additional premium provision be triggered, and neither party should have discretion regarding the timing of such triggering.
All of the events that would give rise to claims under the contract cannot have materialized prior to the inception of the contract. If this "all events" test is not met, then the contract is considered to be a retroactive contract, for which the accounting treatment becomes complex.

Risk transfer requirement

FAS 113 contains two tests, called the '9a and 9b tests,' that collectively require that a contract create a reasonable chance of a significant loss to the underwriter for it to be considered insurance. 9. Indemnification of the ceding enterprise against loss or liability relating to insurance risk in reinsurance of short-duration contracts requires both of the following, unless the condition in paragraph 11 is met: a. The reinsurer assumes significant insurance risk under the reinsured portions of the underlying insurance contracts. b. It is reasonably possible that the reinsurer may realize a significant loss from the transaction. Paragraph 10 of FAS 113 makes clear that the 9a and 9b tests are based on comparing the present value of all costs to the PV of all income streams. FAS gives no guidance on the choice of a discount rate on which to base such a calculation, other than to say that all outcomes tested should use the same rate. Statement of Statutory Accounting Principles ("SSAP") 62, issued by the National Association of Insurance Commissioners, applies to so-called 'statutory accounting' - the accounting for insurance enterprises to conform with regulation. Paragraph 12 of SSAP 62 is nearly identical to the FAS 113 test, while paragraph 14, which is otherwise very similar to paragraph 10 of FAS 113, additionally contains a justification for the use of a single fixed rate for discounting purposes. The choice of an "reasonable and appropriate" discount rate is left as a matter of judgment.

Insurers and Organization

Insurers in the U.S. may be "admitted," meaning that they have been formally admitted to a state's insurance market by the state insurance commissioner, and are subject to various state laws governing organization, capitalization, and claims handling. Or they may be "surplus," meaning that they are nonadmitted in a particular state but are willing to write coverage there. Surplus insurers are supposed to underwrite only very unusual risks. Although insurance brokers are well aware of what risks an admitted insurer will not accept, they must go through a ritual of shopping around a risk to admitted insurers (who will reject it, of course) before applying for coverage with a surplus insurer. Only the smallest insurers exist as a single corporation. Most major insurance companies actually exist as insurance groups. That is, they consist of holding companies which own several admitted and surplus insurers (and sometimes a few excess insurers and reinsurers as well). There are dramatic variations from one insurance group to the next in terms of how its various business functions are divided up among its subsidiaries or outsourced to third party corporations altogether. All major insurance groups in the U.S. that transact insurance in California maintain a publicly accessible list on their Web sites of the actual insurer entities within the group, as required by California Insurance Code Section 702. An example of how insurance groups work is that when people call GEICO and ask for a rate quote, they are actually speaking to GEICO Insurance Agency, which may then write a policy from any one of GEICO's seven insurance companies. When the customer writes their check for the premium to "GEICO," the premium is actually deposited with one of those seven insurance companies (the one that actually wrote their policy). Similarly, any claims against the policy are charged to the issuing company. But as far as most layperson customers know, they are simply dealing with GEICO. Obviously, it is more difficult to operate an insurance group than a single insurance company, since employees must be painstakingly trained to observe corporate formalities so that courts will not treat the entities in the group as alter egos of each other. For example, all insurance policies and all claim-related documents must consistently reference the relevant company within the group, and the flows of premiums and claim payments must be carefully recorded against the books of the correct company. The advantage to the insurance group system is that a group has increased survivability over the long run than a single insurance company. If any one company in the group is hit with too many claims and fails, the company can be quietly placed in runoff but the rest of the group continues to operate. By way of contrast, when small insurers fail, they tend to do so in a rather wild and spectacular fashion. Sometimes the result may be a state-supervised takeover by which a state agency may have to assume part of their residual liabilities.

Insurance in the United States

Insurance in the United States refers to the market for risk in the United States of America. Insurance, generally, is a contract in which the insurer (stock insurance company, mutual insurance company, reciprocal, or Lloyd's syndicate, for example), agrees to compensate or indemnify another party (the insured, the policyholder or a beneficiary) for specified loss or damage to a specified thing (e.g., an item, property or life) from certain perils or risks in exchange for a fee (the insurance premium). For example, a property insurance company may agree to bear the risk that a particular piece of property (e.g., a car or a house) may suffer a specific type or types of damage or loss during a certain period of time in exchange for a fee from the policyholder who would otherwise be responsible for that damage or loss. That agreement takes the form of an insurance policy