Insurance in the United States refers to the market for risk in the United States of America. Some main features of insurance could be said to be,
the benefit provided by a particular kind of indemnity contract, called an insurance policy;
that is issued by one of several kinds of legal entities (stock insurance company, mutual insurance company, reciprocal, or Lloyd's syndicate, for example), any of which may be called an insurer;
in which the insurer promises to pay on behalf of or to indemnify another party, called a policyholder or insured;
that protects the insured against loss caused by those perils subject to the indemnity in exchange for consideration known as an insurance premium.
History
The first insurance company in the United States underwrote fire insurance and was formed in Charles Town (modern-day Charleston), South Carolina, in 1732. Benjamin Franklin helped to popularize and make standard the practice of insurance, particularly against fire in the form of perpetual insurance. In 1752, he founded the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire. Franklin's company was the first to make contributions toward fire prevention. Not only did his company warn against certain fire hazards, it refused to insure certain buildings where the risk of fire was too great, such as all wooden houses.
In the United States, regulation of the insurance industry is highly Balkanized, with primary responsibility assumed by individual state insurance departments. Whereas insurance markets have become centralized nationally and internationally, state insurance commissioners operate individually, though at times in concert through a national insurance commissioners' organization. In recent years, some have called for a dual state and federal regulatory system for insurance similar to that which oversees state banks and national banks.
In the state of New York, which has unique laws in keeping with its stature as a global business centre, former New York Attorney General Eliot Spitzer was in a unique position to grapple with major national insurance brokerages. Spitzer alleged that Marsh & McLennan steered business to insurance carriers based on the amount of contingent commissions that could be extracted from carriers, rather than basing decisions on whether carriers had the best deals for clients. Several of the largest commercial insurance brokerages have since stopped accepting contingent commissions and have adopted new business models.
Definition
In recent years this kind of operational definition proved inadequate as a result of contracts that had the form but not the substance of insurance. The essence of insurance is the transfer of risk from the insured to one or more insurers. How much risk a contract actually transfers proved to be at the heart of the controversy. This issue arose most clearly in reinsurance, where the use of Financial Reinsurance to reengineer insurer balance sheets under US GAAP became fashionable during the 1980s. The accounting profession raised serious concerns about the use of reinsurance in which little if any actual risk was transferred, and went on to address the issue in FAS 113, cited above. While on its face, FAS 113 is limited to accounting for reinsurance transactions, the guidance it contains is generally conceded to be equally applicable to US GAAP accounting for insurance transactions executed by commercial enterprises.
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.
No brightline test
Neither FAS 113 nor SAP 62 defines the terms reasonable or significant. Ideally, one would like to be able to substitute values for both terms. It would be much simpler if one could apply a test of an X percent chance of a loss of Y percent or greater. Such tests have been proposed, including one famously attributed to an SEC official who is said to have opined in an after lunch talk that a 10 percent chance of a 10 percent loss was sufficient to establish both reasonableness and significance. Indeed, many insurers and reinsurers still apply this 10/10" test as a benchmark for risk transfer testing.
It should be obvious that an attempt to use any numerical rule such as the 10/10 test will quickly run into problems. Implicit in the test is keeping the 10/10 that either are upper bonds for the comment made by the SEC official therefore, the rest of this paragraph doesn't apply. Suppose a contract has a 1 percent chance of a 10,000 percent loss? It should be reasonably self-evident that such a contract is insurance, but it fails one half of the 10/10 test.
It does not appear that any brightline test of reasonableness nor significance can be constructed.
Excess of loss contracts, like those commonly used for umbrella and general liability insurance, or to insure against property losses, will typically have a low ratio of premium paid to maximum loss recoverable. This ratio (expressed as a percentage), commonly called the rate on line for historical reasons related to underwriting practices at Lloyd's of London, will typically be low for contracts that contain reasonably self-evident risk transfer. As the ratio increases to approximate the present value of the limit of coverage, self-evidence decreases and disappears.
Contracts with low rates on line may survive modest features that limit the amount of risk transferred. As rates on line increase, such risk limiting features become increasingly important.
"Safe harbor" exemptions
The analysis of reasonableness and significance is an estimate of the probability of different gain or loss outcomes under different loss scenarios. It takes time and resources to perform the analysis, which constitutes a burden without value where risk transfer is reasonably self-evident.
Guidance exists for insurers and reinsurers, whose CEO's and CFO's attest annually as to the reinsurance agreements their firms undertake. The American Academy of Actuaries, for instance, identifies three categories of contract as outside the requirement of attestation:
Inactive contracts. If there are no premiums due nor losses payable, and the insurer is not taking any credit for the reinsurance, determining risk transfer is irrelevant.
Pre-1994 contracts. The attestation requirement only applies to contracts that were entered into, renewed or amended on or after 1 January 1994. Prior contracts need not be analyzed.
Where risk transfer is "reasonably self-evident."“ Risk transfer is reasonably self-evident in most traditional per-risk or per-occurrence excess of loss reinsurance contracts. For these contracts, a predetermined amount of premium is paid and the reinsurer assumes nearly all or all of the potential variability in the underlying losses, and it is evident from reading the basic terms of the contract that the reinsurer can incur a significant loss. In many cases, there is no aggregate limit on the reinsurer's loss. The existence of certain experience-based contract terms, such as experience accounts, profit commissions, and additional premiums, generally reduce the amount of risk transfer and make it less likely that risk transfer is reasonably self-evident. ”
— "Reinsurance Attestation Supplement 20-1: Risk Transfer Testing Practice Note,"
American Academy of Actuaries, November 2005.
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.
Saturday, April 5, 2008
Insurance in Australia
Types of insurance
Life insurance
Life insurance products sold in Australia include Term life insurance, Disability Income insurance. Australian insurers are unusual in providing a lump sum Total and Permanent Disability insurance. Life insurers also sell superannuation investment products.
General insurance
General insurance products sold in the Australian include:
Casualty insurance such as Motor Vehicle and Public Liability Insurance;
Property insurance such as Home and Contents insurance.
Each Australian state has its own form of motor vehicle Compulsory Third Party insurance.
Worker's compensation, while strictly speaking is life insurance, has traditionally been provided by general insurance companies. This compulsory type insurance is subject to extensive state based regulation (including premium rating and reinsurance rules).
Health Insurance
The Australian Government provides a basic universal health insurance, Medicare. Private health insurance in Australia is limited to those services not covered by Medicare or to services provided in private hospitals.
The Australian Taxation system encourages middle to high income earners to take out Private Health Insurance. While most taxpayers pay a 1.5% Medicare Levy, an additional 1% Medicare Levy Surcharge is payable by those taxpayers who earn more than $50,000 and do not have Private Health Insurance.
Industry structure
Life Insurers were traditionally mutual companies, but in the 1980s and 1990’s many of them demutualised and with a few large exceptions are owned by banks. The large remaining insurers have become “financial services” organisations and now derive the majority of their revenue from superannuation investment products.
General Insurers have a more diverse ownership structure, with more stand alone independent general insurers (although some life insurers do own general insurers).
Health insurers are still predominantly mutuals. The notable exception is Medibank Private largest private health insurer in Australia which is owned by the Australian Government.
Regulators / Regulation
see main article Australian insurance law
The prudential aspects of insurance (solvency etc) are regulated by the Australian Prudential Regulatory Authority. Matters relating to advice or disclosure of insurance products sold are regulated by the Australian Securities and Investments Commission.
The primary legislation is:
Life Insurance Act 1995 (Life Insurance)
Insurance Act 1973 (General Insurance)
Industry bodies
The main industry bodies are:
Insurance Council of Australia
Investment and Financial Services Association
Underwriting Agencies Counc
Life insurance
Life insurance products sold in Australia include Term life insurance, Disability Income insurance. Australian insurers are unusual in providing a lump sum Total and Permanent Disability insurance. Life insurers also sell superannuation investment products.
General insurance
General insurance products sold in the Australian include:
Casualty insurance such as Motor Vehicle and Public Liability Insurance;
Property insurance such as Home and Contents insurance.
Each Australian state has its own form of motor vehicle Compulsory Third Party insurance.
Worker's compensation, while strictly speaking is life insurance, has traditionally been provided by general insurance companies. This compulsory type insurance is subject to extensive state based regulation (including premium rating and reinsurance rules).
Health Insurance
The Australian Government provides a basic universal health insurance, Medicare. Private health insurance in Australia is limited to those services not covered by Medicare or to services provided in private hospitals.
The Australian Taxation system encourages middle to high income earners to take out Private Health Insurance. While most taxpayers pay a 1.5% Medicare Levy, an additional 1% Medicare Levy Surcharge is payable by those taxpayers who earn more than $50,000 and do not have Private Health Insurance.
Industry structure
Life Insurers were traditionally mutual companies, but in the 1980s and 1990’s many of them demutualised and with a few large exceptions are owned by banks. The large remaining insurers have become “financial services” organisations and now derive the majority of their revenue from superannuation investment products.
General Insurers have a more diverse ownership structure, with more stand alone independent general insurers (although some life insurers do own general insurers).
Health insurers are still predominantly mutuals. The notable exception is Medibank Private largest private health insurer in Australia which is owned by the Australian Government.
Regulators / Regulation
see main article Australian insurance law
The prudential aspects of insurance (solvency etc) are regulated by the Australian Prudential Regulatory Authority. Matters relating to advice or disclosure of insurance products sold are regulated by the Australian Securities and Investments Commission.
The primary legislation is:
Life Insurance Act 1995 (Life Insurance)
Insurance Act 1973 (General Insurance)
Industry bodies
The main industry bodies are:
Insurance Council of Australia
Investment and Financial Services Association
Underwriting Agencies Counc
History of Insurance in India
Insurance in India has its history dating back till 1818, when Oriental Life Insurance Company was started by Europeans in Kolkata to cater to the needs of European community. Pre-independent era in India saw discrimination among the life of foreigners and Indians with higher premiums being charged for the latter. It was only in the year 1870, Bombay Mutual Life Assurance Society, the first Indian insurance company covered Indian lives at normal rates.
At the dawn of the twentieth century, insurance companies started mushrooming up. In the year 1912, the Life Insurance Companies Act, and the Provident Fund Act were passed to regulate the insurance business. The Life Insurance Companies Act, 1912 made it necessary that the premium rate tables and periodical valuations of companies should be certified by an actuary. However, the disparage still existed as discrimination between Indian and foreign companies. The oldest existing insurance company in India is National Insurance Company Ltd, which was founded in 1906 and is doing business even today. Insurance industry, earlier comprised of only two state insurers. Life Insurers i.e. Life Insurance Corporation of India (LIC) and General Insurers i.e. General Insurance Corporation of India (GIC). GIC had four subsidiary companies.
With effect from December 2000, these subsidiaries have been de-linked from parent company and made as independent insurance companies: Oriental Insurance Company Limited, New India Assurance Company Limited, National Insurance Company Limited and United India Insurance Company Limited.
Related Acts
The insurance sector went through a full circle of phases from being unregulated to completely regulated and then currently being partly deregulated. It is governed by a number of acts, with the first one being the Insurance Act, 1938.
The Insurance Act, 1938
The Insurance Act, 1938 was the first legislation governing all forms of insurance to provide strict state control over insurance business. You can download the act by clicking here
Life Insurance Corporation Act, 1956
Even though the first legislation was enacted in 1938, it was only in 19 January 1956, that life insurance in India was completely nationalized, through a Government ordinance; the Life Insurance Corporation Act, 1956 effective from 1.9.1956 was enancted in the same year to, inter-alia, form LIFE INSURANCE CORPORATION after nationalization of the 245 companies into one entity. There were 245 insurance companies of both Indian and foreign origin in 1956. Nationalization was accomplished by the govt. acquisition of the management of the companies. The Life Insurance Corporation of India was created on 1st September, 1956, as a result and has grown to be the largest insurance company in India as of 2006.[2]
General Insurance Business (Nationalisation) Act, 1972
The General Insurance Business (Nationalisation) Act, 1972 was enacted to nationalise the 100 odd general insurance companies and subsequently merging them into four companies. All the companies were amalgamated into National Insurance, New India Assurance, Oriental Insurance, United India Insurance which were headquartered in each of the four metropolitan cities.[3]
Insurance Regulatory and Development Authority (IRDA) Act, 1999
Till 1999, there were not any private insurance companies in Indian insurance sector. The Govt. of India, then introduced the Insurance Regulatory and Development Authority Act in 1999, thereby de-regulating the insurance sector and allowing private companies into the insurance. Further, foreign investment was also allowed and capped at 26% holding in the Indian insurance companies.
At the dawn of the twentieth century, insurance companies started mushrooming up. In the year 1912, the Life Insurance Companies Act, and the Provident Fund Act were passed to regulate the insurance business. The Life Insurance Companies Act, 1912 made it necessary that the premium rate tables and periodical valuations of companies should be certified by an actuary. However, the disparage still existed as discrimination between Indian and foreign companies. The oldest existing insurance company in India is National Insurance Company Ltd, which was founded in 1906 and is doing business even today. Insurance industry, earlier comprised of only two state insurers. Life Insurers i.e. Life Insurance Corporation of India (LIC) and General Insurers i.e. General Insurance Corporation of India (GIC). GIC had four subsidiary companies.
With effect from December 2000, these subsidiaries have been de-linked from parent company and made as independent insurance companies: Oriental Insurance Company Limited, New India Assurance Company Limited, National Insurance Company Limited and United India Insurance Company Limited.
Related Acts
The insurance sector went through a full circle of phases from being unregulated to completely regulated and then currently being partly deregulated. It is governed by a number of acts, with the first one being the Insurance Act, 1938.
The Insurance Act, 1938
The Insurance Act, 1938 was the first legislation governing all forms of insurance to provide strict state control over insurance business. You can download the act by clicking here
Life Insurance Corporation Act, 1956
Even though the first legislation was enacted in 1938, it was only in 19 January 1956, that life insurance in India was completely nationalized, through a Government ordinance; the Life Insurance Corporation Act, 1956 effective from 1.9.1956 was enancted in the same year to, inter-alia, form LIFE INSURANCE CORPORATION after nationalization of the 245 companies into one entity. There were 245 insurance companies of both Indian and foreign origin in 1956. Nationalization was accomplished by the govt. acquisition of the management of the companies. The Life Insurance Corporation of India was created on 1st September, 1956, as a result and has grown to be the largest insurance company in India as of 2006.[2]
General Insurance Business (Nationalisation) Act, 1972
The General Insurance Business (Nationalisation) Act, 1972 was enacted to nationalise the 100 odd general insurance companies and subsequently merging them into four companies. All the companies were amalgamated into National Insurance, New India Assurance, Oriental Insurance, United India Insurance which were headquartered in each of the four metropolitan cities.[3]
Insurance Regulatory and Development Authority (IRDA) Act, 1999
Till 1999, there were not any private insurance companies in Indian insurance sector. The Govt. of India, then introduced the Insurance Regulatory and Development Authority Act in 1999, thereby de-regulating the insurance sector and allowing private companies into the insurance. Further, foreign investment was also allowed and capped at 26% holding in the Indian insurance companies.
Insurance in India
Insurance is a federal subject in India and has a history dating back to 1818. Life and general insurance in India is still a nascent sector with huge potential for various global players with the life insurance premiums accounting to 2.5% of the country's GDP while general insurance premiums to 0.65% of India's GDP.[1]. The Insurance sector in India has gone through a number of phases and changes, particularly in the recent years when the Govt. of India in 1999 opened up the insurance sector by allowing private companies to solicit insurance and also allowing FDI up to 26%. Ever since, the Indian insurance sector is considered as a booming market with every other global insurance company wanting to have a lion's share. Currently, the largest life insurance company in India is still owned by the government.
Insurance law
Regulation of insurance agencies
The origins of insurance policies in general differs through various countries, limited policies (particularly against damage to homes) can be traced to the 17th and 18th centuries, though establishment of newer policies (such as health insurance and car insurance) did not come until the 20th century. However, regulation on the insurance industry via law began in the 1940s in the United States, through several supreme court rulings. The first ruling on insurance had taken place in 1868 (in the Paul v. Virginia ruling), with the supreme court ruling that insurance policy contracts were not in themselves commercial contracts. This stance did not change until 1944 (in the United States v. South-Eastern Underwriters Association ruling ), when the Supreme court upheld a ruling stating that policies were commercial, and thus were regulatable as other similar contracts were.
Nowadays, many countries - and states in the United States - regulate insurance companies through laws, guidelines and independent commissions and regulatory bodies. These laws and statutes ensure that the policy holder is protected against bad faith claims on the insurers part, that premiums are not unduly high (or fixed), and that contracts and policies issued meet a minimum standard.
A bad faith action may constitute several possibilities; the insurer denies a claim which is seemingly valid in the contract or policy, the insurer refuses to pay out for an unreasonable amount of time, the insurer lays the burden of proof on the insured - often in the case where the claim is unprovable. Other issues of insurance law may arise when price fixing occurs between insurers, creating an unfair competitive environment for consumers. A notable example of this is where Zurich Financial Services - along with several other insurers - inflated policy prices in an anti-competitive fashion. If an insurer is found to be guilty of fraud or deception, they can be fined either by regulatory bodies, or in a lawsuit by the insured or surrounding party. In more severe cases, or if the party has had a series of complaints or rulings, the insurers license may be revoked or suspended.
In the case that an insurer declares bankruptcy, many countries operate independent services and regulation to ensure as little financial hardship is incurred as possible (National Association of Insurance Commissioners operates such a service in the United States ).
The origins of insurance policies in general differs through various countries, limited policies (particularly against damage to homes) can be traced to the 17th and 18th centuries, though establishment of newer policies (such as health insurance and car insurance) did not come until the 20th century. However, regulation on the insurance industry via law began in the 1940s in the United States, through several supreme court rulings. The first ruling on insurance had taken place in 1868 (in the Paul v. Virginia ruling), with the supreme court ruling that insurance policy contracts were not in themselves commercial contracts. This stance did not change until 1944 (in the United States v. South-Eastern Underwriters Association ruling ), when the Supreme court upheld a ruling stating that policies were commercial, and thus were regulatable as other similar contracts were.
Nowadays, many countries - and states in the United States - regulate insurance companies through laws, guidelines and independent commissions and regulatory bodies. These laws and statutes ensure that the policy holder is protected against bad faith claims on the insurers part, that premiums are not unduly high (or fixed), and that contracts and policies issued meet a minimum standard.
A bad faith action may constitute several possibilities; the insurer denies a claim which is seemingly valid in the contract or policy, the insurer refuses to pay out for an unreasonable amount of time, the insurer lays the burden of proof on the insured - often in the case where the claim is unprovable. Other issues of insurance law may arise when price fixing occurs between insurers, creating an unfair competitive environment for consumers. A notable example of this is where Zurich Financial Services - along with several other insurers - inflated policy prices in an anti-competitive fashion. If an insurer is found to be guilty of fraud or deception, they can be fined either by regulatory bodies, or in a lawsuit by the insured or surrounding party. In more severe cases, or if the party has had a series of complaints or rulings, the insurers license may be revoked or suspended.
In the case that an insurer declares bankruptcy, many countries operate independent services and regulation to ensure as little financial hardship is incurred as possible (National Association of Insurance Commissioners operates such a service in the United States ).
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