Insurance may be considered a game of risk in which individuals and businesses protect themselves, their families, and their property from possible losses resulting from unpredictable events such as storms, fires, accidents, and illnesses. The first rule of the game, devised centuries ago is “share the risk.” To play by this rule, many people take a small loss in place of one person’s taking a large one.
It is a simple idea: An individual pays a small amount of money called a premium to an agent who acts on behalf of an insurance company, or underwriter, which holds the individual’s premium and the premiums paid by thousands of others. The individual receives an insurance policy, a promise that if there is a loss to the individual as defined in the policy the insurance company will pay for it. The funds will come from the individual’s premium, the premiums paid by others who did not have losses, and money from the company’s investment of all the premiums. An individual who does not have a loss loses the premium money but purchases what insurance underwriters call “peace of mind.” It is a gamble for both the customer and the underwriter, but it is built on the first rule of risk: those losses are small when shared by many.
The insurance industry has a large range of jobs that service various parts of the business. In addition to underwriters, who decide whether or not a risk should be insured, and agents, who sell the coverage, the industry employs many kinds of engineers, who inspect property and offer advice on making property safer. When a loss occurs, claim adjusters investigate its cause as, for example, in a fire and decide how much the insurance company owes its policyholder.
The industry has developed specialists called actuaries, who, through mathematical and statistical analysis, help underwriters determine the rates applied to life insurance premiums. The industry also employs a wide range of physicians, lawyers, computer experts, mathematicians, and others to support all the major players in the game of risk.
In the later part of the 20th century, general industry has developed its own insurance specialists who specialize in purchasing insurance for their corporations. These risk managers must be acquainted with all forms of insurance and are generally in charge of deciding what insurance a corporation should buy and how much it should pay.
Insurance comes in many varieties. Categories include property, liability, homeowners’, automobile, medical, life, workers’ compensation, and marine.
Property insurance is the modern form of the fire insurance that was sold by early insurance companies. The name has changed because the coverage has changed. No longer are just the losses resulting from fire protected by property insurance. Such losses as those from windstorm, theft, vandalism, and water damage are also covered.
Liability insurance is the most important kind of business insurance. A liability is a duty one person owes another, or is liable for, for some special reason. Liability insurance pays an individual or a business for liabilities that result from unforeseen situations.
Homeowners’ insurance is a combination offering both property and liability coverage. Usually it includes protection for a person’s home, any other buildings on the property, and for the buildings’ contents and personal belongings except automobiles and pets. The policy can be written to include the property of guests. If disaster strikes, homeowners’ insurance usually pays a family’s living expenses until they get settled at home once again.
Car insurance is the most complicated kind of insurance purchased by individuals. It combines several kinds of property and liability coverage. The standard automobile policy includes collision insurance, covering property damage to a car when it is struck by another vehicle, and comprehensive insurance, covering general property damage that occurs when an automobile is damaged by something other than another vehicle.
Medical insurance pays the costs of hospitalization and physicians’ fees for insured individuals who are injured or become ill.
Life insurance is designed to insure lives, though it frequently includes coverage for major disabilities such as the loss of limbs or organs. There are basically three kinds of life insurance that may be purchased by individuals for themselves or others or by employers for their employees.
Workers’ compensation is a special state-controlled insurance purchased by employers for the benefit of their employees. Like general liability and medical payment liability insurance, it pays for medical treatment required by employees of a company according to a state-regulated schedule of benefits. The object is to prevent employees from the need to sue their employers if they are injured and to compensate workers for losses from accidents on the job.
The oldest form of insurance that scholars have been able to document, marine insurance now includes much more than the shared risk of ships’ cargo. It might best be called transportation insurance because variations of the coverage include protection for ships, trucks, railroads, and aircraft. Underwriters generally divide it into two types: ocean marine, which deals with every kind of water conveyance, and inland marine for truck and rail cargo.