The public health system is called Medicare. It ensures free universal access to hospital treatment and subsidised out-of-hospital medical treatment. It is funded by a 1.5% tax levy.
The private health system is funded by a number of private health insurance organisations. The largest of these is Medibank Private, which is government-owned, but operates as a government business enterprise under the same regulatory regime as all other registered private health funds. The conservative Howard government had announced that Medibank will be privatised in 2008 if it won the 2007 election. The electorate however voted into office the opposing Australian Labor Party under Kevin Rudd which had already pledged that it would remain in government ownership if the party was elected into office.
Some private health insurers are 'for profit' enterprises, and some are non-profit organizations such as HCF Health Insurance. Some have membership restricted to particular groups, but the majority have open membership.
Most aspects of private health insurance in Australia are regulated by the Private Health Insurance Act 2007.
The private health system in Australia operates on a "community rating" basis, whereby premiums do not vary solely because of a person's previous medical history, current state of health, or (generally speaking) their age (but see Lifetime Health Cover below). Balancing this are waiting periods, in particular for pre-existing conditions (usually referred to within the industry as PEA, which stands for "pre-existing ailment"). Funds are entitled to impose a waiting period of up to 12 months on benefits for any medical condition the signs and symptoms of which existed during the six months ending on the day the person first took out insurance. They are also entitled to impose a 12-month waiting period for benefits for treatment relating to an obstetric condition, and a 2-month waiting period for all other benefits when a person first takes out private insurance. Funds have the discretion to reduce or remove such waiting periods in individual cases. They are also free not to impose them to begin with, but this would place such a fund at risk of "adverse selection", attracting a disproportionate number of members from other funds, or from the pool of intending members who might otherwise have joined other funds. It would also attract people with existing medical conditions, who might not otherwise have taken out insurance at all because of the denial of benefits for 12 months due to the PEA Rule. The benefits paid out for these conditions would create pressure on premiums for all the fund's members, causing some to drop their membership, which would lead to further rises, and a vicious cycle would ensue.
There are a number of other matters about which funds are not permitted to discriminate between members in terms of premiums, benefits or membership - these include racial origin, religion, sex, sexual orientation, nature of employment, and leisure activities. Premiums for a fund's product that is sold in more than one state can vary from state to state, but not within the same state.
The Australian government has introduced a number of incentives to encourage adults to take out private hospital insurance. These include:
Lifetime Health Cover: If a person has not taken out private hospital cover by the 1st July after their 30th birthday, then when (and if) they do so after this time, their premiums must include a loading of 2% per annum. Thus, a person taking out private cover for the first time at age 40 will pay a 10 per cent loading. The loading continues for 10 years. The loading applies only to premiums for hospital cover, not to ancillary (extras) cover.
Medicare Levy Surcharge: People whose taxable income is greater than a specified amount (currently $50,000 for singles and $100,000 for families) and who do not have an adequate level of private hospital cover must pay a 1% surcharge on top of the standard 1.5% Medicare Levy. The rationale is that if the people in this income group are forced to pay more money one way or another, most would choose to purchase hospital insurance with it, with the possibility of a benefit in the event that they need private hospital treatment - rather than pay it in the form of extra tax as well as having to meet their own private hospital costs.
Private Health Insurance Rebate: The government subsidises the premiums for all private health insurance cover, including hospital and ancillary (extras), by 30%, 35% or 40%.
Thursday, December 20, 2007
Health insurance in Canada
Most health insurance in Canada is administered by each province, under the national law that requires all people to have free access to basic health services. Collectively, the public provincial health insurance systems in Canada are frequently referred to as Medicare. Private health insurance in Canada is allowed only for services that the public health plans do not cover; for example, semi-private or private rooms in hospitals and prescription drug plans. Canadians also must use private insurance for elective medical services such as Lasik surgery, plastic surgery such as liposuction, and other non-basic medical procedures. Private health insurance cannot cover physician fees which are covered by Medicare. Some 65% of Canadians have some form of supplementary private health insurance; many of them receive it through their employers.[50] Private-sector services not paid for by the government account for nearly 30 percent of total health care spending.[51] In 2005, the Supreme Court of Quebec ruled, in Chaoulli v. Quebec, that the prohibition on insurance for health care already insured by the state constitutes an infringement of the right to life and security. It is yet to be seen if this ruling will change the overall delivery of health insurance across Canada.
Other factors affecting insurance prices
A recent study by PriceWaterhouseCoopers examining the drivers of rising health care costs in the U.S. pointed to increased utilization created by increased consumer demand, new treatments, and more intensive diagnostic testing, as the most significant driver.[13] People in developed countries are living longer. The population of those countries is aging, and a larger group of senior citizens requires more intensive medical care than a young healthier population. Advances in medicine and medical technology can also increase the cost of medical treatment. Other factors that increase utilization and therefore insurance prices are lifestyle-related: increases in obesity caused by insufficient exercise and unhealthy food choices; excessive alcohol use, smoking, and use of street drugs. Other factors noted by the PWC study included the movement to broader-access plans, higher-priced technologies, and cost-shifting from Medicaid and the uninsured to private payers.[13]
Adverse selection
Insurance companies use the term "adverse selection" to describe the tendency for only those who will benefit from insurance to buy it. Specifically when talking about health insurance, unhealthy people are more likely to purchase health insurance because they anticipate large medical bills. On the other side, people who consider themselves to be reasonably healthy may decide that medical insurance is an unnecessary expense; if they see the doctor once a year and it costs $250, that's much better than making monthly insurance payments of $400 (example figures).
The fundamental concept of insurance is that it balances costs across a large, random sample of individuals (see risk pool). For instance, an insurance company has a pool of 1000 randomly selected subscribers, each paying $100 per month. One person becomes very ill while the others stay healthy, allowing the insurance company to use the money paid by the healthy people to pay for the treatment costs of the sick person. However, when the pool is self-selecting rather than random, as is the case with individuals seeking to purchase health insurance directly, adverse selection is a greater concern.[5] Some individuals have extremely high medical expenses, in extreme cases totaling a half million dollars or more. These represent a relatively small percentage of the insured population, however. [6] Adverse selection could leave an insurance company with primarily sick subscribers and no way to balance out the cost of their medical expenses with a large number of healthy subscribers.
Because of adverse selection, insurance companies employ medical underwriting, using a patient's medical history to screen out those whose pre-existing medical conditions pose too great a risk for the risk pool. Before buying health insurance, a person typically fills out a comprehensive medical history form that asks whether the person smokes, how much the person weighs, whether the person has been treated for any of a long list of diseases and so on. In general, those who present a large financial burdens are denied coverage or charged high premiums to compensate.[7] One large U.S. industry survey found that roughly 13 percent of applicants for comprehensive, individually purchased health insurance who went through the medical underwriting in 2004 were denied coverage. Declination rates increased significantly with age, rising from 5 percent for individuals 18 and under to just under a third for individuals aged 60 to 64.[8] Among those who were offered coverage, the study found that 76% received offers at standard premium rates, and 22% were offered higher rates.[9] On the other side, applicants can get discounts if they do not smoke and are healthy.[10]
Starting in 1976, some states started providing guaranteed-issuance risk pools, which enable individuals who are medically uninsurable through private health insurance to purchase a state-sponsored health insurance plan, usually at higher cost. Minnesota was the first to offer such a plan; 34 states now offer them. Plans vary greatly from state to state, both in their costs and benefits to consumers and to their methods of funding and operations. They serve a very small portion of the uninsurable market — about 182,000 people in the U.S. as of 2004,[11] but in best cases allow people with pre-existing conditions such as cancer, diabetes, heart disease or other chronic illnesses to be able to switch jobs or seek self-employment without fear of being without health care benefits.[12] Efforts to pass a national pool have as yet been unsuccessful, but some federal tax money has been awarded to states to innovate and improve their plans.
The fundamental concept of insurance is that it balances costs across a large, random sample of individuals (see risk pool). For instance, an insurance company has a pool of 1000 randomly selected subscribers, each paying $100 per month. One person becomes very ill while the others stay healthy, allowing the insurance company to use the money paid by the healthy people to pay for the treatment costs of the sick person. However, when the pool is self-selecting rather than random, as is the case with individuals seeking to purchase health insurance directly, adverse selection is a greater concern.[5] Some individuals have extremely high medical expenses, in extreme cases totaling a half million dollars or more. These represent a relatively small percentage of the insured population, however. [6] Adverse selection could leave an insurance company with primarily sick subscribers and no way to balance out the cost of their medical expenses with a large number of healthy subscribers.
Because of adverse selection, insurance companies employ medical underwriting, using a patient's medical history to screen out those whose pre-existing medical conditions pose too great a risk for the risk pool. Before buying health insurance, a person typically fills out a comprehensive medical history form that asks whether the person smokes, how much the person weighs, whether the person has been treated for any of a long list of diseases and so on. In general, those who present a large financial burdens are denied coverage or charged high premiums to compensate.[7] One large U.S. industry survey found that roughly 13 percent of applicants for comprehensive, individually purchased health insurance who went through the medical underwriting in 2004 were denied coverage. Declination rates increased significantly with age, rising from 5 percent for individuals 18 and under to just under a third for individuals aged 60 to 64.[8] Among those who were offered coverage, the study found that 76% received offers at standard premium rates, and 22% were offered higher rates.[9] On the other side, applicants can get discounts if they do not smoke and are healthy.[10]
Starting in 1976, some states started providing guaranteed-issuance risk pools, which enable individuals who are medically uninsurable through private health insurance to purchase a state-sponsored health insurance plan, usually at higher cost. Minnesota was the first to offer such a plan; 34 states now offer them. Plans vary greatly from state to state, both in their costs and benefits to consumers and to their methods of funding and operations. They serve a very small portion of the uninsurable market — about 182,000 people in the U.S. as of 2004,[11] but in best cases allow people with pre-existing conditions such as cancer, diabetes, heart disease or other chronic illnesses to be able to switch jobs or seek self-employment without fear of being without health care benefits.[12] Efforts to pass a national pool have as yet been unsuccessful, but some federal tax money has been awarded to states to innovate and improve their plans.
Inherent problems with insurance
Insurance systems must typically deal with two inherent challenges: adverse selection, which affects any voluntary system, and ex-post moral hazard, which affects any insurance system in which a third party bears major responsibility for payment, whether that is an employer or the government.
Health plan vs. health insurance
Historically, HMOs tended to use the term "health plan", while commercial insurance companies used the term "health insurance". A health plan can also refer to a subscription-based medical care arrangement offered through health maintenance organization,HMO, PPO, or POS plan. These plans are similar to pre-paid dental, pre-paid legal, and pre-paid vision plans. Pre-paid health plans typically pay for a fixed number of services (for instance, $300 in preventive care, a certain number of days of hospice care or care in a skilled nursing facility, a fixed number of home health visits, a fixed number of spinal manipulation charges, etc.) The services offered are usually at the discretion of a utilization review nurse who is often contracted through the managed care entity providing the subscription health plan. This determination may be made either prior to or after hospital admission (concurrent utilization review).
How it works(health insurance)
A Health insurance policy is a contract between an insurance company and an individual. The contract can be renewable annually or monthly. The type and amount of health care costs that will be covered by the health plan are specified in advance, in the member contract or Evidence of Coverage booklet. The individual policy-holder's payment obligations may take several forms[4]:
Premium: The amount the policy-holder pays to the health plan each month to purchase health coverage.
Deductible: The amount that the policy-holder must pay out-of-pocket before the health plan pays its share. For example, a policy-holder might have to pay a $500 deductible per year, before any of their health care is covered by the health plan. It may take several doctor's visits or prescription refills before the policy-holder reaches the deductible and the health plan starts to pay for care.
Copayment: The amount that the policy-holder must pay out of pocket before the health plan pays for a particular visit or service. For example, a policy-holder might pay a $45 copayment for a doctor's visit, or to obtain a prescription. A copayment must be paid each time a particular service is obtained.
Coinsurance: Instead of paying a fixed amount up front (a copayment), the policy-holder must pay a percentage of the total cost. For example, the member might have to pay 20% of the cost of a surgery, while the health plan pays the other 80%. Because there is no upper limit on coinsurance, the policy-holder can end up owing very little, or a significant amount, depending on the actual costs of the services they obtain.
Exclusions: Not all services are covered. The policy-holder is generally expected to pay the full cost of non-covered services out of their own pocket.
Coverage limits: Some health plans only pay for health care up to a certain dollar amount. The policy-holder may be expected to pay any charges in excess of the health plan's maximum payment for a specific service. In addition, some plans have annual or lifetime coverage maximums. In these cases, the health plan will stop payment when they reach the benefit maximum, and the policy-holder must pay all remaining costs.
Out-of-pocket maximums: Similar to coverage limits, except that in this case, the member's payment obligation ends when they reach the out-of-pocket maximum, and the health plan pays all further covered costs. Out-of-pocket maximums can be limited to a specific benefit category (such as prescription drugs) or can apply to all coverage provided during a specific benefit year.
Prescription drug plans are a form of insurance offered through many employer benefit plans in the U.S., where the patient pays a copayment and the prescription drug insurance pays the rest.[citation needed]
Some health care providers will agree to bill the insurance company if patients are willing to sign an agreement that they will be responsible for the amount that the insurance company doesn't pay, as the insurance company pays according to "reasonable" or "customary" charges, which may be less than the provider's usual fee.[citation needed]
Health insurance companies also often have a network of providers who agree to accept the reasonable and customary fee and waive the remainder.[citation needed] It will generally cost the patient less to use an in-network provider.[citation needed]
Premium: The amount the policy-holder pays to the health plan each month to purchase health coverage.
Deductible: The amount that the policy-holder must pay out-of-pocket before the health plan pays its share. For example, a policy-holder might have to pay a $500 deductible per year, before any of their health care is covered by the health plan. It may take several doctor's visits or prescription refills before the policy-holder reaches the deductible and the health plan starts to pay for care.
Copayment: The amount that the policy-holder must pay out of pocket before the health plan pays for a particular visit or service. For example, a policy-holder might pay a $45 copayment for a doctor's visit, or to obtain a prescription. A copayment must be paid each time a particular service is obtained.
Coinsurance: Instead of paying a fixed amount up front (a copayment), the policy-holder must pay a percentage of the total cost. For example, the member might have to pay 20% of the cost of a surgery, while the health plan pays the other 80%. Because there is no upper limit on coinsurance, the policy-holder can end up owing very little, or a significant amount, depending on the actual costs of the services they obtain.
Exclusions: Not all services are covered. The policy-holder is generally expected to pay the full cost of non-covered services out of their own pocket.
Coverage limits: Some health plans only pay for health care up to a certain dollar amount. The policy-holder may be expected to pay any charges in excess of the health plan's maximum payment for a specific service. In addition, some plans have annual or lifetime coverage maximums. In these cases, the health plan will stop payment when they reach the benefit maximum, and the policy-holder must pay all remaining costs.
Out-of-pocket maximums: Similar to coverage limits, except that in this case, the member's payment obligation ends when they reach the out-of-pocket maximum, and the health plan pays all further covered costs. Out-of-pocket maximums can be limited to a specific benefit category (such as prescription drugs) or can apply to all coverage provided during a specific benefit year.
Prescription drug plans are a form of insurance offered through many employer benefit plans in the U.S., where the patient pays a copayment and the prescription drug insurance pays the rest.[citation needed]
Some health care providers will agree to bill the insurance company if patients are willing to sign an agreement that they will be responsible for the amount that the insurance company doesn't pay, as the insurance company pays according to "reasonable" or "customary" charges, which may be less than the provider's usual fee.[citation needed]
Health insurance companies also often have a network of providers who agree to accept the reasonable and customary fee and waive the remainder.[citation needed] It will generally cost the patient less to use an in-network provider.[citation needed]
History and evolution of health insurance
The concept of health insurance was proposed in 1694 by Hugh the Elder Chamberlen from the Peter Chamberlen family. In the late 19th century, "accident insurance" began to be available, which operated much like modern disability insurance.[2]. This payment model continued until the start of the 20th century in some jurisdictions (like California), where all laws regulating health insurance actually referred to disability insurance.[3] Patients were expected to pay all other health care costs out of their own pockets, under what is known as the fee-for-service business model. During the middle to late 20th century, traditional disability insurance evolved into modern health insurance programs. Today, most comprehensive private health insurance programs cover the cost of routine, preventive, and emergency health care procedures, and also most prescription drugs, but this was not always the case.
About Health insurance
The term health insurance is generally used to describe a form of insurance that pays for medical expenses. It is sometimes used more broadly to include insurance covering disability or long-term nursing or custodial care needs. It may be provided through government-sponsored social insurance programs, purchased on a group basis (e.g., by a firm to cover its employees) or purchased by individual consumers. In each case, the groups or individuals covered pay premiums or taxes in order to help protect themselves from high or unexpected healthcare expenses. Similar benefits paying for medical expenses may also be provided through social welfare programs funded by the government rather than the beneficiaries.
Health insurance works by estimating the overall risk of healthcare expenses and developing a routine finance structure (such as a monthly premium, or annual tax) that will ensure that money is available to pay for the healthcare benefits specified in the insurance agreement. The healthcare benefit is administered by a central organization, which is most often either a government agency, or a private or not-for-profit entity operating a health plan. [1]
Market-based health care systems such as that in the United States rely heavily on private and not-for-profit health insurance. In the U.S., according to the Census Bureau, some 60% of the population receives health insurance coverage through employer-sponsored plans. Government programs cover another 27% of the population, and about 9% of the population purchases insurance directly.
Health insurance works by estimating the overall risk of healthcare expenses and developing a routine finance structure (such as a monthly premium, or annual tax) that will ensure that money is available to pay for the healthcare benefits specified in the insurance agreement. The healthcare benefit is administered by a central organization, which is most often either a government agency, or a private or not-for-profit entity operating a health plan. [1]
Market-based health care systems such as that in the United States rely heavily on private and not-for-profit health insurance. In the U.S., according to the Census Bureau, some 60% of the population receives health insurance coverage through employer-sponsored plans. Government programs cover another 27% of the population, and about 9% of the population purchases insurance directly.
Wednesday, December 19, 2007
What kinds of individual and family insurance plans are available?
Individual and family health insurance plans are usually described as either "indemnity" or "managed-care" plans. Put broadly, the major differences concern choice of healthcare providers, out-of-pocket costs and how bills are paid. Typically, indemnity plans offer a broader selection of healthcare providers than managed care plans. Indemnity plans pay their share of the costs for covered services only after they receive a bill (which means that you may have to pay up front and then obtain reimbursement from your health insurance company).
There are several different types of managed-care health insurance plans. These include HMO, PPO, and POS plans. Managed-care plans typically make use of healthcare provider networks. Healthcare providers within a network agree to perform services for managed-care plan patients at pre-negotiated rates and will usually submit the claim to the insurance company for you. In general, you'll have less paperwork and lower out-of-pocket costs with a managed care health insurance plan and a broader choice of healthcare providers with an indemnity plan.
There are several different types of managed-care health insurance plans. These include HMO, PPO, and POS plans. Managed-care plans typically make use of healthcare provider networks. Healthcare providers within a network agree to perform services for managed-care plan patients at pre-negotiated rates and will usually submit the claim to the insurance company for you. In general, you'll have less paperwork and lower out-of-pocket costs with a managed care health insurance plan and a broader choice of healthcare providers with an indemnity plan.
What kinds of individual and family insurance plans are available?
Individual and family health insurance plans are usually described as either "indemnity" or "managed-care" plans. Put broadly, the major differences concern choice of healthcare providers, out-of-pocket costs and how bills are paid. Typically, indemnity plans offer a broader selection of healthcare providers than managed care plans. Indemnity plans pay their share of the costs for covered services only after they receive a bill (which means that you may have to pay up front and then obtain reimbursement from your health insurance company).
There are several different types of managed-care health insurance plans. These include HMO, PPO, and POS plans. Managed-care plans typically make use of healthcare provider networks. Healthcare providers within a network agree to perform services for managed-care plan patients at pre-negotiated rates and will usually submit the claim to the insurance company for you. In general, you'll have less paperwork and lower out-of-pocket costs with a managed care health insurance plan and a broader choice of healthcare providers with an indemnity plan.
There are several different types of managed-care health insurance plans. These include HMO, PPO, and POS plans. Managed-care plans typically make use of healthcare provider networks. Healthcare providers within a network agree to perform services for managed-care plan patients at pre-negotiated rates and will usually submit the claim to the insurance company for you. In general, you'll have less paperwork and lower out-of-pocket costs with a managed care health insurance plan and a broader choice of healthcare providers with an indemnity plan.
What is individual and family health insurance?
Individual and family health insurance is a type of health insurance coverage that is made available to individuals and families, rather than to employer groups or organizations. Given the option, most people would prefer to have their employer provide group health insurance coverage. But, if this is not an option for you, it is still important for you to seek coverage. You may be pleasantly surprised with the variety and affordability of the individual and family health insurance options available.
Tuesday, December 18, 2007
Principles of insurance
Commercially insurable risks typically share seven common characteristics.
[1]A large number of homogeneous exposure units.
The vast majority of insurance policies are provided for individual members of very large classes. Automobile insurance, for example, covered about 175 million automobiles in the United States in 2004.The existence of a large number of homogeneous exposure units allows insurers to benefit from the so-called “law of large numbers,” which in effect states that as the number of exposure units increases, the actual results are increasingly likely to become close to expected results. There are exceptions to this criterion. Lloyd's of London is famous for insuring the life or health of actors, actresses and sports figures. Satellite Launch insurance covers events that are infrequent. Large commercial property policies may insure exceptional properties for which there are no ‘homogeneous’ exposure units. Despite failing on this criterion, many exposures like these are generally considered to be insurable.
[2]Definite Loss.
The event that gives rise to the loss that is subject to insurance should, at least in principle, take place at a known time, in a known place, and from a known cause. The classic example is death of an insured 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.
[3]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, are generally not considered insurable.
[4]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 little point in paying such costs unless the protection offered has real value to a buyer.
[5]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, it is not likely that anyone will buy insurance, even if on offer. Further, as the accounting profession formally recognizes in financial accounting standards (See FAS 113 for example), 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, the transaction may have the form of insurance, but not the substance.
[6]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.
[7]Limited risk of catastrophically large losses.
The essential risk is often aggregation. If the same event can cause losses to numerous policyholders of the same insurer, the ability of that insurer to issue policies becomes constrained, not by factors surrounding the individual characteristics of a given policyholder, but by the factors surrounding the sum of all policyholders so exposed. Typically, insurers prefer to limit their exposure to a loss from a single event to some small portion of their capital base, on the order of 5 percent. Where the loss can be aggregated, or an individual policy could produce exceptionally large claims, the capital constraint will restrict an insurers appetite for additional policyholders. The classic example is earthquake insurance, where the ability of an underwriter to issue a new policy depends on the number and size of the policies that it has already underwritten. Wind insurance in hurricane zones, particularly along coast lines, is another example of this phenomenon. In extreme cases, the aggregation can affect the entire industry, since the combined capital of insurers and reinsurers can be small compared to the needs of potential policyholders in areas exposed to aggregation risk. 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.
[1]A large number of homogeneous exposure units.
The vast majority of insurance policies are provided for individual members of very large classes. Automobile insurance, for example, covered about 175 million automobiles in the United States in 2004.The existence of a large number of homogeneous exposure units allows insurers to benefit from the so-called “law of large numbers,” which in effect states that as the number of exposure units increases, the actual results are increasingly likely to become close to expected results. There are exceptions to this criterion. Lloyd's of London is famous for insuring the life or health of actors, actresses and sports figures. Satellite Launch insurance covers events that are infrequent. Large commercial property policies may insure exceptional properties for which there are no ‘homogeneous’ exposure units. Despite failing on this criterion, many exposures like these are generally considered to be insurable.
[2]Definite Loss.
The event that gives rise to the loss that is subject to insurance should, at least in principle, take place at a known time, in a known place, and from a known cause. The classic example is death of an insured 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.
[3]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, are generally not considered insurable.
[4]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 little point in paying such costs unless the protection offered has real value to a buyer.
[5]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, it is not likely that anyone will buy insurance, even if on offer. Further, as the accounting profession formally recognizes in financial accounting standards (See FAS 113 for example), 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, the transaction may have the form of insurance, but not the substance.
[6]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.
[7]Limited risk of catastrophically large losses.
The essential risk is often aggregation. If the same event can cause losses to numerous policyholders of the same insurer, the ability of that insurer to issue policies becomes constrained, not by factors surrounding the individual characteristics of a given policyholder, but by the factors surrounding the sum of all policyholders so exposed. Typically, insurers prefer to limit their exposure to a loss from a single event to some small portion of their capital base, on the order of 5 percent. Where the loss can be aggregated, or an individual policy could produce exceptionally large claims, the capital constraint will restrict an insurers appetite for additional policyholders. The classic example is earthquake insurance, where the ability of an underwriter to issue a new policy depends on the number and size of the policies that it has already underwritten. Wind insurance in hurricane zones, particularly along coast lines, is another example of this phenomenon. In extreme cases, the aggregation can affect the entire industry, since the combined capital of insurers and reinsurers can be small compared to the needs of potential policyholders in areas exposed to aggregation risk. 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.
Thursday, December 13, 2007
Life Insurance
Life Insurance is most commonly used to financially protect your family from the premature death of you and/or your spouse. Unfortunately, it's probably the least favorite thing to plan for. And, as a result, adequate planning is often put off until it's too late.
Although it may sound simple, there are many things to consider. There are many ways to protect your family with life insurance. So, consulting with a Life Insurance Professional can be vital!
Not Only For Family Protection
Life insurance planning is not only for those who support a family. There are several reasons for thorough life insurance planning. For example, have you recently purchased a new home? Have you recently been married? Have you made career changes? Other key purposes of life insurance include retirement and estate planning.
Life Insurance Proceeds & Taxes
Many people don't realize that even though life insurance proceeds are paid income tax-free to the beneficiary, there's a good chance the proceeds will be included in the value of your estate which may be taxed.
I Have Life Insurance Through Work
People often make the mistake of assuming their employer-provided life insurance is adequate. However, employer-provided life insurance is typically only equal to one year's salary...far from enough for the family provider to protect his/her family adequately, and not enough for the average single person to repay outstanding debts – often leaving parents and siblings dealing with such bills.
Although it may sound simple, there are many things to consider. There are many ways to protect your family with life insurance. So, consulting with a Life Insurance Professional can be vital!
Not Only For Family Protection
Life insurance planning is not only for those who support a family. There are several reasons for thorough life insurance planning. For example, have you recently purchased a new home? Have you recently been married? Have you made career changes? Other key purposes of life insurance include retirement and estate planning.
Life Insurance Proceeds & Taxes
Many people don't realize that even though life insurance proceeds are paid income tax-free to the beneficiary, there's a good chance the proceeds will be included in the value of your estate which may be taxed.
I Have Life Insurance Through Work
People often make the mistake of assuming their employer-provided life insurance is adequate. However, employer-provided life insurance is typically only equal to one year's salary...far from enough for the family provider to protect his/her family adequately, and not enough for the average single person to repay outstanding debts – often leaving parents and siblings dealing with such bills.
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