The History and Principles of Insurance
Insurance as we know it today could be traced to the Great Fire
of London, that in 1666 devoured 13,200 houses. After this
disaster Nicholas Barbon opened an office to insure buildings.
In 1680 he established England's 1st fire insurance company,
"The Fire Office", to insure brick and frame homes. The first
insurance firm in the United States provided fire insurance was
formed in Charles Town (modern day Charleston), South Carolina,
in 1732.
In 1752, Benjamin Franklin founded the Philadelphia Aid for the
Insurance of Houses from Loss by Fire. It refused to insure some
buildings in which the risk of fire was too great, like 100%
wooden buildings.
The Principles of Insurance:
The exact time or occurrence of the loss need to be uncertain.
The value of losses ought to be relatively unsurprising. In
order to determine premiums or in other words to calculate price
levels, insurers must be able to estimate them. Insurers require
to know the price it would be called upon to pay once the
insured event occurs. Most types of insurance have maximal
levels of payouts, with several exceptions such as health
insurance.
The loss should be significant: The legal principle of De
minimis (From Latin:about minimal things) dictates that
negligible matters are not covered.The payment paid by the
insured to the insurer for assuming the risk is known as the
'premium'.
Potential causes of chance that may give rise to insurance
claims are named "perils". Examples of perils might be fire,
theft, earthquake, hurricane and numbers of additional possible
risks. An insurance policy will set out in details which perils
are covered by the policy and which are not. The damage must not
be a catastrophic in scale, If the insurer is insolvent, it will
be unable to pay the insured. In the United States, there are
Guaranty Funds to reimburse insured victims whose insurance
companies are bankrupt. This program is managed by the National
Association of Insurance Commissioners (NAIC).
Indemnification (compensation)
Anyone wishing to transport risk (an individual, corporation,
or organization of any type) becomes the 'insured' party once
risk is assumed by an 'insurer', the insuring party, by means of
a contract, defined as an insurance 'policy'. This legal
agreement sets out terms specifying the total of coverage
(reimbursement) to be rendered to the insured, by the insurer
upon assumption of risk, in the event of a loss, and 100% the
specific perils covered against (indemnified), for the duration
of the contract.
When insured parties experience a loss, for a specified peril,
the coverage allows the policyholder to produce a 'claim'
against the insurer for the amount of damage when specified by
the policy contract.
Financial viability of insurance companies
Financial stability and posture of the insurance company need
to be a major factor When purchasing an insurance contract. An
insurance premium paid currently provides coverage for damges
which can arise few years in the future. Due to that, the
financial strength of the insurance carrier is most significant.
In the past few years, a few of insurance companies became
unable to pay, neglecting their policyholders with out coverage
(or coverage merely from a government backed insurance pool with
less the Priciples and History of InsuranceS-favorable payouts
for losses). A number of independent rating agencies, like
Best's, provide facts and rate the financial strength of
insurance firms.
Risks Assessment
The insurer uses actuarial science to quantify the risk they
are prepared to consider. Information is gathered to approximate
future insurance claims, ordinarily with reasonable accuracy.
Actuarial science employs statistics and probability to analyze
the risks associated with the range of perils covered, and these
scientific principles are utilized by insurers, in combination
with other factors, to decide rate composition.
The Gambling Analogy
Certain people erroneously assume insurance a type of wager
(particularly as associated with moral hazard) which executes
over the policy period of time. The insurance company bets that
you or your property will not suffer a damage while you put
money on the opposite outcome. Virtually all house owner's
insurance does not cover floods. Using insurance, you are
managing risk that you may not otherwise prevent, and that does
not lend itself the chance of benefit (pure risk). In other
words, gambling isn't an insurable risk.
The "insurance" of Social Solidarity
A few of religious groups among them the Amish and Muslims
refrain from insurance and instead depend on support provided by
their society when disasters strike. This could be thought of as
"social insurance", as the risk of any given person is assumed
collectively by the community who will completely bear the cost
of reconstruction. In closed, mutual help communities in which
other people might actually step in to rebuild total lost
property, this arrangement could function. The majority of
societies could not effectively support this type of models and
it will not function for catastrophic risks. (Source:
http://en.wikipedia.org/wiki/Insurance).