Home insurance, also commonly called hazard insurance or homeowner's insurance (often abbreviated in the US real estate industry

as HOI), is a type of property insurance that covers a private residence. It is an insurance policy that combines various personal insurance protections, which can include losses occurring to one's home, its contents, loss of use (additional living expenses), or loss of other personal possessions of the homeowner, as well as liability insurance for accidents that may happen at the home or at the hands of the homeowner within the policy territory. Homeowner's policy is referred to as a multiple-line insurance policy, meaning that it includes both property insurance and liability coverage, with an indivisible premium, meaning that a single premium is paid for all risks. In the US standard forms divide coverage into several categories, and the coverage provided is typically a percentage of Coverage A, which is coverage for the main dwelling.[1] The cost of homeowner's insurance often depends on what it would cost to replace the house and which additional endorsements or riders are attached to the policy. The insurance policy is a legal contract between the insurance carrier (insurance company) and the named insured(s). It is a contract of indemnity and will put the insured back to the state he/she was in prior to the loss. Typically, claims due to floods or war (whose definition typically includes a nuclear explosion from any source) are excluded from coverage, amongst other standard exclusions (like termites). Special insurance can be purchased for these possibilities, including flood insurance. Insurance is adjusted to reflect replacement cost, usually upon application of an inflation factor or a cost index. The home insurance policy is usually a term contract, i.e. a contract that is in effect for a fixed period of time. The payment the insured makes to the insurer is called the premium. The insured must pay the insurer the premium each term. Most insurers charge a lower premium if it appears less likely the home will be damaged or destroyed: for example, if the house is situated next to a fire station or is equipped with fire sprinklers and fire alarms; if the house exhibits wind mitigation measures, such as hurricane shutters; or if the house has a security system and has insurer-approved locks installed. Perpetual insurance, a type of home insurance without a fixed term, can also be obtained in certain areas. Contents [hide] 1 In the United States 1.1 History 1.2 Policies 1.3 Coverage rates 1.4 Coverage classifications 1.4.1 Causes of loss 1.5 Claims process 2 In the United Kingdom

3 References 4 External links In the United States[edit]

A home in Louisiana damaged by Hurricane Katrina In the United States, most home buyers borrow money in the form of a mortgage loan, and the mortgage lender often requires that the buyer purchases homeowner's insurance as a condition of the loan, in order to protect the bank if the home is destroyed. Anyone with an insurable interest in the property should be listed on the policy. In some cases the mortgagee will waive the need for the mortgagor to carry homeowner's insurance if the value of the land exceeds the amount of the mortgage balance. In a case like this, even the total destruction of any buildings would not affect the ability of the lender to be able to foreclose and recover the full amount of the loan. Home insurance in the United States may differ from other countries; for example, in Britain, subsidence and subsequent foundation failure is usually covered under an insurance policy.[2] United States insurance companies used to offer foundation insurance, which was reduced to coverage for damage due to leaks, and finally eliminated altogether.[3] The insurance is often misunderstood by its purchasers; for example, many believe that mold is covered when it is not a standard coverage.[4] History[edit] The first homeowner's policy per se in the United States was introduced in September 1950, but similar policies had existed in Great Britain and certain areas of the United States. In the late 1940s, US insurance law was reformed and during this process multiple line statutes were written, allowing homeowner's policies to become legal.[5] Prior to the 1950s, there were separate policies for the various perils that could affect a home. A homeowner would have had to purchase separate policies covering fire losses, theft, personal property, and the like. During the 1950s, policy forms were developed allowing the homeowner to purchase all the insurance they needed on one complete policy. However, these policies varied by insurance company, and were difficult to comprehend.[6] The need for standardization grew so great that a private company based in Jersey City, New Jersey, Insurance Services Office, also known as the ISO, was formed in 1971 to provide risk information and it issued simplified homeowner's policy forms for reselling to insurance companies. These policies have been amended over the years.[citation needed]

Modern developments have changed the insurance coverage terms, availability, and pricing.[7] Homeowner's insurance has been relatively unprofitable, due in part to catastrophes such as hurricanes as well as regulators' reluctance to authorize price increases.[7] Coverages have been reduced instead and companies have diverged from the former standardized model ISO forms.[7] Water damage due to burst pipes in particular has been restricted or in some cases entirely eliminated.[7] Other restrictions included time limits, complex replacement cost calculations (which may not reflect the true cost to replace), and reductions in wind damage coverage.[7] Policies[edit] The Insurance Services Office has standardized the following homeowner's insurance policy forms in general use[citation needed] (names of the forms are given per the following reference[8]): HO0 Dwelling Fire Form A form that provides coverage on a home against fire, smoke, windstorm, hail, lightning, explosion, vehicles, and civil unrest. It does not cover your personal property, personal liability, or medical expenses. It is the type of policy your mortgage lender will buy for you if you let your homeowner policy lapse. HO1 Basic Form A basic policy form that provides coverage on a home against 11 listed perils; contents are generally included in this type of coverage, but must be explicitly enumerated. The perils include fire or lightning, windstorm or hail, vandalism or malicious mischief, theft, damage from vehicles and aircraft, explosion, riot or civil commotion, glass breakage, smoke, volcanic eruption, and personal liability. Exceptions include floods, earthquakes. Most states no longer offer this type of coverage. HO2 Broad Form A more advanced form that provides coverage on a home against 16 listed perils (including all 11 on the HO1). The coverage is usually a "named perils" policy, which lists the events that would be covered. HO3 Special Form The typical, most comprehensive form used for single-family homes. The policy provides "all risk" coverage on the home with some perils excluded, such as earthquake and flood. Contents are covered on a named peril basis. (Note: "all risk" is poorly termed as it is essentially named exclusions (i.e., if it is not specifically excluded, it is covered).) HO4 Contents Broad Form The Contents Broad, or Tenants, form is for renters. It covers personal property against the same perils as the contents portion of the HO2 or HO3.[9] An HO4 generally also includes liability coverage for personal injury or property damage inflicted on others.

HO5 Comprehensive Form Covers the same as HO3 plus more. On this policy the contents are covered on an open peril basis, therefore as long as the cause of loss is not specifically excluded in the policy it will be covered for that cause of loss. HO6 Unit-Owners Form The form for condominium owners. It insures your personal property, your walls, floors and ceiling against all of the perils in the Broad Form. HO8 Modified Coverage Form The form is for the owner-occupied older home whose replacement cost far exceeds the property's market value. Coverage rates[edit] According to a 1998 National Association of Insurance Commissioners (NAIC) report, 83% of homes were covered by owner-occupied homeowners policies. Of these, 87% had the HO3 Special, and 8% had the more expensive HO5 Comprehensive. Both of these policies are "all risks" or "open perils", meaning that they cover all perils except those specifically excluded. 3% were the HO2 Broad, which covers only specific named perils. Others, at 1% each, include the HO1 Basic and the HO8 Modified, which is the most limited in its coverage. HO8, also known as older home insurance, is likely to pay only actual cash value for damages rather than replacement.[10] The remaining 13% of home insurance policies were covered by renter's or condominium insurance. Two-thirds of these had the HO-4 Contents Broad form, also known as renters insurance, which covers the contents of an apartment not specifically covered in the blanket policy written for the complex. This policy can also cover liability arising from injury to guests as well as negligence of the renter within the coverage territory. Common coverage areas are events such as lightning, riot, aircraft, explosion, vandalism, smoke, theft, windstorm or hail, falling objects, volcanic eruption, snow, sleet, and weight of ice. The remainder had the HO-6 Unit-Owners policy, also known as a condominium insurance, which is designed for the owners of condos and includes coverage for the part of the building owned by the insured and for the property housed therein. Designed to span the gap between the coverage provided by the blanket policy written for the entire neighborhood or building and the personal property inside the home. The condominium association's by-laws may determine the total amount of insurance necessary. E.g., in Florida, the scope of coverage is prescribed by statute 718.111(11)(f).[11] In addition, about 2.4% of homes were covered by a dwelling fire policy[10] (the term dwelling fire comes from the fact that, originally, these home owner's policies only covered fires) which covers property damage to a structure and is typically sold to noncommercial owners of rented houses. It may also cover the owner's personal property (such as appliances and furnishings). The owner's liability may be extended from their own primary home insurance and, thus, may not comprise part of the Dwelling Fire policy.

It should be noted that not all states allow the ISO forms to be utilized or may require that additional clauses are included to meet state insurance regulations. Typically consumers can save money by purchasing their insurance directly from a company rather than through an agent, but there are not many companies selling home insurance directly.[12] However, an experienced agent can provide expertise (especially expertise with the local insurance environment) that a company may lack.[13] Coverage classifications[edit] For each policy, there are typically 5 classifications of coverage. These are based on standard Insurance Services Office or American Association of Insurance Services forms. Section I Property Coverages Coverage A Dwelling Covers the value of the dwelling itself (not including the land). Typically, a coinsurance clause states that as long as the dwelling is insured to 80% of actual value, losses will be adjusted at replacement cost, up to the policy limits. This is in place to give a buffer against inflation. HO-4 (renter's insurance) typically has no Coverage A, although it has additional coverages for improvements. Coverage B Other Structures Covers other structure around the property that are not used for business, except as a private garage. Typically limited at 10% to 20% of the Coverage A, with additional amounts available by endorsement. Coverage C Personal Property Covers personal property, with limits for the theft and loss of particular classes of items (e.g., $200 for money, banknotes, bullion, coins, medals, etc.). Typically 50 to 70% of coverage A is required for contents, which means that consumers may pay for much more insurance than necessary. This has led to some calls for more choice.[14] Coverage D Loss of Use/Additional Living Expenses Covers expenses associated with additional living expenses (i.e. rental expenses) and fair rental value, if part of the residence was rented, however only the rental income for the actual rent of the space not services provided such as utilities. Additional Coverages Covers a variety of expenses such as debris removal, reasonable repairs, damage to trees and shrubs for certain named perils (excluding the most common causes of damage, wind and ice), fire department changes, removal of property, credit card / identity theft charges, loss assessment, collapse, landlord's furnishing, and some building additions. These vary depending upon the form.

Exclusions In an open perils policy, specific exclusions will be stated in this section. These generally include earth movement, water damage, power failure, neglect, war, nuclear hazard, septic tank back-up expenses, intentional loss, and concurrent causation (for HO3).[15] The concurrent causation exclusion excludes losses where both a covered and an excluded loss occur. In addition, the exclusion for building ordinance can mean that increased expenses due to local ordinances may not be covered.[16] A 2013 survey of Americans found that 41% believed mold was covered, although it is typically not covered if the water damage occurs over a period of time, such as through a leaky pipe.[17] Floods Flood damage is typically excluded under standard homeowners and renters insurance policies. Flood coverage, however, is available in the form of a separate policy both from the National Flood Insurance Program (NFIP) and from a few private insurers. [18]

Section II Liability Coverages Coverage E Personal Liability covers damages which the insured is legally liable for and provides a legal defense at the insurer's own expense. About a third of the losses for this coverage are from dog bites.[19] Causes of loss[edit] According to the 2008 Insurance Information Institute factbook, for every $100 of premium, in 2005 on average $16 went to fire and lightning, $30 to wind and hail, $11 to water damage and freezing, $4 for other causes, and $2 for theft. An additional $3 went to liability and medical payments and $9 for claims settlement expenses, and the remaining $25 was allocated to insurer expenses.[20] One study of fires found that most were caused by heating incidents, although smoking was a risk factor for fatal fires.[21] Claims process[edit] After a loss, the insured is expected to take steps to mitigate the loss. Insurance policies typically require that the insurer be notified within a reasonable time period. After that, a claims adjuster will investigate the claim and the insured may be required to provide various information. Filing a claim may result in an increase in rates, or in nonrenewal or cancellation. In addition, insurers may share the claim data in an industry database (the two major ones are CLUE and A-PLUS[22]), with Claim Loss Underwriting Exchange (CLUE) by Choicepoint receiving data from 98% of U.S. insurers.[23] In the United Kingdom[edit]

As in the US, mortgage lenders within the UK require the rebuild value (the actual cost of rebuilding a property to its current state should it be damaged or destroyed) of a property to be covered as a condition of the loan. However, the rebuild cost is often lower than the market value of the property, as the market value often reflects the property as a going-concern, as opposed to just the value of the bricks and mortar. A number of factors, such as an increase in fraud and increasingly unpredictable weather, have seen home insurance premiums continue to rise in the UK.[24] For this reason, there has been a shift in how home insurance is bought in the UKas customers become a lot more price sensitive, there has been a large increase in the amount of policies sold through price comparison sites. In addition to standard home insurance, some 8 million households in the UK are categorized as being a "non standard" risk. These households would require a Specialist or Non Standard insurer that would cover home insurance needs for people that have criminal convictions and/or subsidence in the property or have previously been underpinned. When Home Prices Go Up, Do You Need More Home Insurance? Real estate prices climbed 20% in 2013 in some places. Do higher sales values mean you should bump up the amount of insurance coverage on your home?

Among experts, theres little doubt the real estate market is bouncing back. Dr. Stan Humphries, chief economist at Zillow.com, says some real-estate hot-spots saw home prices increase more than 20% in 2013. Most real estate analysts expect positive trends to continue in 2014, with more modest home value increases of 3%-4% in most U.S. markets.

Some real-estate hot-spots saw home prices increase more than 20% in 2013. Dr. Stan Humphries, Zillow.com But these predictions have some homeowners concerned. If the values of their properties rise, will they be forced to increase their home insurance coverage and monthly payments to keep pace and continue to protect their investments? Not necessarily.

First, it is important to understand the difference between the market value and replacement cost value of your home. Market value refers to the amount your house would be worth if you were to sell it and is largely dependent on real estate trends. Its static because it incorporates such changeable factors as whether the home is in a trendy location. It also includes the value of the land under your home.

Replacement cost value is more black and white. It refers to the total amount it would cost to rebuild your house from the ground up if it were declared a total loss due to a covered peril such as a fire.

Understanding Market Value Vs. Replacement Cost Value

Eric Stauffer, insurance expert and president of ExpertInsuranceReviews.com, explains: Bringing home insurance back to the basics, it is designed to protect your (typically) largest asset from damage or destruction. That means you want to insure your home for what it would cost to replace, not what it is worth. The total sale price of a home factors in things like land and views, which are irrelevant when rebuilding or repairing.

...you want to insure your home for what it would cost to replace, not what it is worth. Eric Stauffer, ExpertInsuranceReviews.com Ashley Hunter, an insurance broker in Austin, TX, adds that most perils, such as fire, dont affect the value of the lot itself. If a tree falls through your roof or a tornado blows through your yard and results in the total loss of your home, it typically wouldnt result in a depreciation of the value of the land it sits on. Thats why its not a factor when calculating the total replacement cost of a home.

When Does A Higher Home Value Require Home Insurance Updates?

Among the largest factors in determining the market value of a home is evaluating the actual sales prices of comparable properties. If your homes market value has increased recently simply as a result of the upswing in the real estate market and construction costs in your region have remained constant there should not be a direct effect on its replacement cost value. Therefore, you shouldnt have to make major changes to your home insurance policy in order to continue to protect your investments.

However, there are times when an increase in property value does require additional home insurance considerations. Hunter recommends notifying your insurance agent when you make major renovations such as adding a room, gutting bathrooms and kitchens for improvements, and installing swimming pools anything that would require a homeowner to get permits.

Similarly, adding value to your home by remodeling the kitchen with newer more expensive materials typically requires some updates to your home insurance policy, since the cost of replacing these materials could exceed your previous coverage limits.

Most homeowners insurance policies have a built-in coverage called Inflation Guard that automatically increases the value of the property annually, usually 3-5%, Hunter says. In other words, overall rising costs of inflation and predicted trends for rising home values in 2014 have already likely been accounted for and included in the base portion of your premium.

One warning: Dont just assume your policy includes this provision. Ask your agent to make sure. Insurance From Wikipedia, the free encyclopedia This article is about risk management. For Insurance (blackjack), see Blackjack. For the contract between insurer and insured, see Insurance policy. Financial market participants Assorted United States coins.jpg Collective investment schemes Credit unions Insurance companies Investment banks Pension funds Prime brokers Trusts Finance series Financial market Participants Corporate finance Personal finance Public finance Banks and banking Financial regulation vte Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange for payment. It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. According to study texts of The Chartered Insurance Institute, there are the following categories of risk: Financial risks which means that the risk must have financial measurement.

Pure risks which means that the risk must be real and not related to gambling Particular risks which means that these risks are not widespread in their effect, for example such as earthquake risk for the region prone to it.

It is commonly accepted that only financial, pure and particular risks are insurable.

An insurer, or insurance carrier, is a company selling the insurance; the insured, or policyholder, is the person or entity buying the insurance policy. The amount of money to be charged for a certain amount of insurance coverage is called the premium. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice. The transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer's promise to compensate (indemnify) the insured in the case of a financial (personal) loss. The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insured will be financially compensated. Early methods[edit]

Merchants have sought methods to minimize risks since early times. Pictured, Governors of the Wine Merchant's Guild by Ferdinand Bol, c. 1680. Methods for transferring or distributing risk were practiced by Chinese and Babylonian traders as long ago as the 3rd and 2nd millennia BC, respectively.[1] Chinese merchants travelling treacherous river rapids would redistribute their wares across many vessels to limit the loss due to any single vessel's capsizing. The Babylonians developed a system which was recorded in the famous Code of Hammurabi, c. 1750 BC, and practiced by early Mediterranean sailing merchants. If a merchant received a loan to fund his shipment, he would pay the lender an additional sum in exchange for the lender's guarantee to cancel the loan should the shipment be stolen or lost at sea. At some point in the 1st millennium BC, the inhabitants of Rhodes created the 'general average'. This allowed groups of merchants to pay to insure their goods being shipped together. The collected premiums would be used to reimburse any merchant whose goods were jettisoned during transport, whether to storm or sinkage.[2] Separate insurance contracts (i.e., insurance policies not bundled with loans or other kinds of contracts) were invented in Genoa in the 14th century, as were insurance pools backed by pledges of landed estates. The first known insurance contract dates from Genoa in 1347, and in the next century maritime

insurance developed widely and premiums were intuitively varied with risks.[3] These new insurance contracts allowed insurance to be separated from investment, a separation of roles that first proved useful in marine insurance. Modern insurance[edit] Insurance became far more sophisticated in Enlightenment era Europe, and specialized varieties developed.

Lloyd's Coffee House was the first marine insurance company. Property insurance as we know it today can be traced to the Great Fire of London, which in 1666 devoured more than 13,000 houses. The devastating effects of the fire converted the development of insurance "from a matter of convenience into one of urgency, a change of opinion reflected in Sir Christopher Wren's inclusion of a site for 'the Insurance Office' in his new plan for London in 1667".[4] A number of attempted fire insurance schemes came to nothing, but in 1681, economist Nicholas Barbon and eleven associates established the first fire insurance company, the "Insurance Office for Houses", at the back of the Royal Exchange to insure brick and frame homes. Initially, 5,000 homes were insured by his Insurance Office.[5] At the same time, the first insurance schemes for the underwriting of business ventures became available. By the end of the seventeenth century, London's growing importance as a centre for trade was increasing demand for marine insurance. In the late 1680s, Edward Lloyd opened a coffee house, which became the meeting place for parties in the shipping industry wishing to insure cargoes and ships, and those willing to underwrite such ventures. These informal beginnings led to the establishment of the insurance market Lloyd's of London and several related shipping and insurance businesses.[6]

Leaflet promoting the National Insurance Act 1911. The first life insurance policies were taken out in the early 18th century. The first company to offer life insurance was the Amicable Society for a Perpetual Assurance Office, founded in London in 1706 by William Talbot and Sir Thomas Allen.[7][8] Edward Rowe Mores established the Society for Equitable Assurances on Lives and Survivorship in 1762. It was the world's first mutual insurer and it pioneered age based premiums based on mortality rate laying the framework for scientific insurance practice and development and the basis of modern life assurance upon which all life assurance schemes were subsequently based.[9]

In the late 19th century, "accident insurance" began to become available. This operated much like modern disability insurance.[10][11] The first company to offer accident insurance was the Railway Passengers Assurance Company, formed in 1848 in England to insure against the rising number of fatalities on the nascent railway system. By the late 19th century, governments began to initiate national insurance programs against sickness and old age. Germany built on a tradition of welfare programs in Prussia and Saxony that began as early as in the 1840s. In the 1880s Chancellor Otto von Bismarck introduced old age pensions, accident insurance and medical care that formed the basis for Germany's welfare state.[12][13] In Britain more extensive legislation was introduced by the Liberal government in the 1911 National Insurance Act. This gave the British working classes the first contributory system of insurance against illness and unemployment.[14] This system was greatly expanded after the Second World War under the influence of the Beveridge Report, to form the first modern welfare state.[12][15] Principles[edit]

Insurance involves pooling funds from many insured entities (known as exposures) to pay for the losses that some may incur. The insured entities are therefore protected from risk for a fee, with the fee being dependent upon the frequency and severity of the event occurring. In order to be an insurable risk, the risk insured against must meet certain characteristics. Insurance as a financial intermediary is a commercial enterprise and a major part of the financial services industry, but individual entities can also self-insure through saving money for possible future losses.[16] Insurability[edit] Main article: Insurability Risk which can be insured by private companies typically shares seven common characteristics:[17] Large number of similar exposure units: Since insurance operates through pooling resources, the majority of insurance policies are provided for individual members of large classes, allowing insurers to benefit from the law of large numbers in which predicted losses are similar to the actual losses. Exceptions include Lloyd's of London, which is famous for insuring the life or health of actors, sports figures, and other famous individuals. However, all exposures will have particular differences, which may lead to different premium rates. Definite loss: The loss takes place at a known time, in a known place, and from a known cause. The classic example is death of an insured person on a life insurance policy. Fire, automobile accidents, and worker injuries may all easily meet this criterion. Other types of losses may only be definite in theory. Occupational disease, for instance, may involve prolonged exposure to injurious conditions where no specific time, place, or cause is identifiable. Ideally, the time, place, and cause of a loss should be clear enough that a reasonable person, with sufficient information, could objectively verify all three elements.

Accidental loss: The event that constitutes the trigger of a claim should be fortuitous, or at least outside the control of the beneficiary of the insurance. The loss should be pure, in the sense that it results from an event for which there is only the opportunity for cost. Events that contain speculative elements, such as ordinary business risks or even purchasing a lottery ticket, are generally not considered insurable. Large loss: The size of the loss must be meaningful from the perspective of the insured. Insurance premiums need to cover both the expected cost of losses, plus the cost of issuing and administering the policy, adjusting losses, and supplying the capital needed to reasonably assure that the insurer will be able to pay claims. For small losses, these latter costs may be several times the size of the expected cost of losses. There is hardly any point in paying such costs unless the protection offered has real value to a buyer. Affordable premium: If the likelihood of an insured event is so high, or the cost of the event so large, that the resulting premium is large relative to the amount of protection offered, then it is not likely that the insurance will be purchased, even if on offer. Furthermore, as the accounting profession formally recognizes in financial accounting standards, the premium cannot be so large that there is not a reasonable chance of a significant loss to the insurer. If there is no such chance of loss, then the transaction may have the form of insurance, but not the substance. (See the US Financial Accounting Standards Board standard number 113) Calculable loss: There are two elements that must be at least estimable, if not formally calculable: the probability of loss, and the attendant cost. Probability of loss is generally an empirical exercise, while cost has more to do with the ability of a reasonable person in possession of a copy of the insurance policy and a proof of loss associated with a claim presented under that policy to make a reasonably definite and objective evaluation of the amount of the loss recoverable as a result of the claim. Limited risk of catastrophically large losses: Insurable losses are ideally independent and noncatastrophic, meaning that the losses do not happen all at once and individual losses are not severe enough to bankrupt the insurer; insurers may prefer to limit their exposure to a loss from a single event to some small portion of their capital base. Capital constrains insurers' ability to sell earthquake insurance as well as wind insurance in hurricane zones. In the US, flood risk is insured by the federal government. In commercial fire insurance, it is possible to find single properties whose total exposed value is well in excess of any individual insurer's capital constraint. Such properties are generally shared among several insurers, or are insured by a single insurer who syndicates the risk into the reinsurance market. Legal[edit] When a company insures an individual entity, there are basic legal requirements. Several commonly cited legal principles of insurance include:[18] Indemnity the insurance company indemnifies, or compensates, the insured in the case of certain losses only up to the insured's interest.

Benefit insurance - as it is stated in the study books of The Chartered Insurance Institute, the isurance company doesn't have the right of recovery from the party who caused the injury and is to compensate the Insured regardless of the fact that Insured had already sued the negligent party for the damages (for example, personal accident insurance) Insurable interest the insured typically must directly suffer from the loss. Insurable interest must exist whether property insurance or insurance on a person is involved. The concept requires that the insured have a "stake" in the loss or damage to the life or property insured. What that "stake" is will be determined by the kind of insurance involved and the nature of the property ownership or relationship between the persons. The requirement of an insurable interest is what distinguishes insurance from gambling. Utmost good faith (Uberrima fides) the insured and the insurer are bound by a good faith bond of honesty and fairness. Material facts must be disclosed. Contribution insurers which have similar obligations to the insured contribute in the indemnification, according to some method. Subrogation the insurance company acquires legal rights to pursue recoveries on behalf of the insured; for example, the insurer may sue those liable for the insured's loss. The Insurers can waive their subrogation rights by using the special clauses. Causa proxima, or proximate cause the cause of loss (the peril) must be covered under the insuring agreement of the policy, and the dominant cause must not be excluded Mitigation In case of any loss or casualty, the asset owner must attempt to keep loss to a minimum, as if the asset was not insured. Indemnification[edit] Main article: Indemnity To "indemnify" means to make whole again, or to be reinstated to the position that one was in, to the extent possible, prior to the happening of a specified event or peril. Accordingly, life insurance is generally not considered to be indemnity insurance, but rather "contingent" insurance (i.e., a claim arises on the occurrence of a specified event). There are generally three types of insurance contracts that seek to indemnify an insured: a "reimbursement" policy, and a "pay on behalf" or "on behalf of"[19] policy, and an "indemnification" policy. From an insured's standpoint, the result is usually the same: the insurer pays the loss and claims expenses.

If the Insured has a "reimbursement" policy, the insured can be required to pay for a loss and then be "reimbursed" by the insurance carrier for the loss and out of pocket costs including, with the permission of the insurer, claim expenses.[19][20] Under a "pay on behalf" policy, the insurance carrier would defend and pay a claim on behalf of the insured who would not be out of pocket for anything. Most modern liability insurance is written on the basis of "pay on behalf" language which enables the insurance carrier to manage and control the claim. Under an "indemnification" policy, the insurance carrier can generally either "reimburse" or "pay on behalf of", whichever is more beneficial to it and the insured in the claim handling process. An entity seeking to transfer risk (an individual, corporation, or association of any type, etc.) becomes the 'insured' party once risk is assumed by an 'insurer', the insuring party, by means of a contract, called an insurance policy. Generally, an insurance contract includes, at a minimum, the following elements: identification of participating parties (the insurer, the insured, the beneficiaries), the premium, the period of coverage, the particular loss event covered, the amount of coverage (i.e., the amount to be paid to the insured or beneficiary in the event of a loss), and exclusions (events not covered). An insured is thus said to be "indemnified" against the loss covered in the policy. When insured parties experience a loss for a specified peril, the coverage entitles the policyholder to make a claim against the insurer for the covered amount of loss as specified by the policy. The fee paid by the insured to the insurer for assuming the risk is called the premium. Insurance premiums from many insureds are used to fund accounts reserved for later payment of claims in theory for a relatively few claimants and for overhead costs. So long as an insurer maintains adequate funds set aside for anticipated losses (called reserves), the remaining margin is an insurer's profit. Societal effects[edit]

Insurance can have various effects on society through the way that it changes who bears the cost of losses and damage. On one hand it can increase fraud; on the other it can help societies and individuals prepare for catastrophes and mitigate the effects of catastrophes on both households and societies. Insurance can influence the probability of losses through moral hazard, insurance fraud, and preventive steps by the insurance company. Insurance scholars have typically used morale hazard to refer to the increased loss due to unintentional carelessness and moral hazard to refer to increased risk due to intentional carelessness or indifference.[21] Insurers attempt to address carelessness through inspections, policy provisions requiring certain types of maintenance, and possible discounts for loss mitigation efforts. While in theory insurers could encourage investment in loss reduction, some commentators have argued that in practice insurers had historically not aggressively pursued loss control measures particularly to prevent disaster losses such as hurricanesbecause of concerns over rate reductions and legal battles. However, since about 1996 insurers have begun to take a more active role in loss mitigation, such as through building codes.[22]

Methods of insurance[edit] In accordance with study books of The Chartered Insurance Institute, there are the following types of insurance: Co-insurance which relates to risks shared between insurers or between insurer and Insured Dual insurance which relates to risks having two or more policies with same coverage Self-insurance which relates to the situations when the risk is not trasferred to insurance companies and solely retained by the entities or individuals themselves Reinsurance which relates to the situtations when Insurer passes some part of or all risks to another Insurer called Reinsurer

Insurers' business model[edit]

Underwriting and investing[edit] The business model is to collect more in premium and investment income than is paid out in losses, and to also offer a competitive price which consumers will accept. Profit can be reduced to a simple equation: Profit = earned premium + investment income - incurred loss - underwriting expenses. Insurers make money in two ways: Through underwriting, the process by which insurers select the risks to insure and decide how much in premiums to charge for accepting those risks By investing the premiums they collect from insured parties The most complicated aspect of the insurance business is the actuarial science of ratemaking (pricesetting) of policies, which uses statistics and probability to approximate the rate of future claims based on a given risk. After producing rates, the insurer will use discretion to reject or accept risks through the underwriting process. At the most basic level, initial ratemaking involves looking at the frequency and severity of insured perils and the expected average payout resulting from these perils. Thereafter an insurance company will collect historical loss data, bring the loss data to present value, and compare these prior losses to the premium collected in order to assess rate adequacy.[23] Loss ratios and expense loads are also used. Rating for different risk characteristics involves at the most basic level comparing the losses with "loss relativities"a policy with twice as many losses would therefore be charged twice as much. More

complex multivariate analyses are sometimes used when multiple characteristics are involved and a univariate analysis could produce confounded results. Other statistical methods may be used in assessing the probability of future losses. Upon termination of a given policy, the amount of premium collected minus the amount paid out in claims is the insurer's underwriting profit on that policy. Underwriting performance is measured by something called the "combined ratio"[24] which is the ratio of expenses/losses to premiums. A combined ratio of less than 100 percent indicates an underwriting profit, while anything over 100 indicates an underwriting loss. A company with a combined ratio over 100% may nevertheless remain profitable due to investment earnings. Insurance companies earn investment profits on "float". Float, or available reserve, is the amount of money on hand at any given moment that an insurer has collected in insurance premiums but has not paid out in claims. Insurers start investing insurance premiums as soon as they are collected and continue to earn interest or other income on them until claims are paid out. The Association of British Insurers (gathering 400 insurance companies and 94% of UK insurance services) has almost 20% of the investments in the London Stock Exchange.[25] In the United States, the underwriting loss of property and casualty insurance companies was $142.3 billion in the five years ending 2003. But overall profit for the same period was $68.4 billion, as the result of float. Some insurance industry insiders, most notably Hank Greenberg, do not believe that it is forever possible to sustain a profit from float without an underwriting profit as well, but this opinion is not universally held. Naturally, the float method is difficult to carry out in an economically depressed period. Bear markets do cause insurers to shift away from investments and to toughen up their underwriting standards, so a poor economy generally means high insurance premiums. This tendency to swing between profitable and unprofitable periods over time is commonly known as the underwriting, or insurance, cycle.[26] Claims[edit] Claims and loss handling is the materialized utility of insurance; it is the actual "product" paid for. Claims may be filed by insureds directly with the insurer or through brokers or agents. The insurer may require that the claim be filed on its own proprietary forms, or may accept claims on a standard industry form, such as those produced by ACORD. Insurance company claims departments employ a large number of claims adjusters supported by a staff of records management and data entry clerks. Incoming claims are classified based on severity and are assigned to adjusters whose settlement authority varies with their knowledge and experience. The adjuster undertakes an investigation of each claim, usually in close cooperation with the insured, determines if coverage is available under the terms of the insurance contract, and if so, the reasonable monetary value of the claim, and authorizes payment.

The policyholder may hire their own public adjuster to negotiate the settlement with the insurance company on their behalf. For policies that are complicated, where claims may be complex, the insured may take out a separate insurance policy add on, called loss recovery insurance, which covers the cost of a public adjuster in the case of a claim. Adjusting liability insurance claims is particularly difficult because there is a third party involved, the plaintiff, who is under no contractual obligation to cooperate with the insurer and may in fact regard the insurer as a deep pocket. The adjuster must obtain legal counsel for the insured (either inside "house" counsel or outside "panel" counsel), monitor litigation that may take years to complete, and appear in person or over the telephone with settlement authority at a mandatory settlement conference when requested by the judge. If a claims adjuster suspects under-insurance, the condition of average may come into play to limit the insurance company's exposure. In managing the claims handling function, insurers seek to balance the elements of customer satisfaction, administrative handling expenses, and claims overpayment leakages. As part of this balancing act, fraudulent insurance practices are a major business risk that must be managed and overcome. Disputes between insurers and insureds over the validity of claims or claims handling practices occasionally escalate into litigation (see insurance bad faith). Marketing[edit] Insurers will often use insurance agents to initially market or underwrite their customers. Agents can be captive, meaning they write only for one company, or independent, meaning that they can issue policies from several companies. The existence and success of companies using insurance agents is likely due to improved and personalized service.[27]