ACTUARIAL THEORY Insurance
lends itself only to the treatment of pure risk. Pure risk involves uncertainty only as to
loss (an automobile owner, for example, might or might not lose the automobile through a
collision, fire, or other calamity), without affording any possibility of gain. Under the concept of indemnity, which is central
to insurance, insurance is merely to cover a financial loss. The insured person is not to be placed in a better
economic position that he or she occupied before the insured loss occurred. An
insurable pure risk must satisfy the following conditions: (1) the risk must have a
sufficiently large number of homogeneous units of exposure (preferably thousands) to
permit actuaries--the statisticians who work out insurance risks and costs
mathematically-- to predict the number and average size of insured losses for a given
period; (2) if the risk produces one or more
losses, each loss must be identifiable in time and space and must be measurable (that is,
the insurer has to know when and where an insured loss has occurred and how much to pay); (3) the premium charged on the risk must be low
enough to attract a sufficient number of insured people, yet high enough to support the
numbers of probable losses; and (4) the risk
must be free of any potential catastrophe that could produce loss in excess of the ability
of the insurer to respond. Condition (4)
implies that the homogeneous units must be independently exposed to loss. That is, a loss of one should not lead to a loss
of another. For this reason insuring of
separated dwellings may be practical, whereas strike insurance covering employees subject
to industrywide collective bargaining may not. BASIC TYPES OF INSURANCE One
useful way of classifying insurance is by major categories: life, health, and
property-liability (also called property-casualty). LIFE
INSURANCE includes promises of the insurer to pay the policy proceeds when the insured
dies or attains a given age. Life insurance
also normally is deemed to include annuities, which are the promise of the insurer to make
periodic payments to an individual for life or for a certain period. Health insurance carries the promise of the
insurer to pay specified health-care costs, such as hospital charges or doctor bills, or
to make periodic payments to an individual who meets the policy's definition of disability
(see HEALTH-CARE SYSTEMS). Property-liability
includes all the insurance that does not fit under either of the other two categories.
Examples include insurance on a school building, automobiles and FIRE INSURANCE, ocean
marine insurance, and legal liability insurance. (Another
classification system divides insurance into group and individual policies. A group policy might be the contract purchased by
an employer to provide health care to employees and their families, or the contract to
provide life insurance for each eligible employee. At
least one-third of all insurance premiums relate to group insurance.) Within
the three basic categories of insurance one can find several hundred different lines of
insurance, with new lines being created and marketed each year, as the need for the new
insurance arises. For example, insurance has
recently been made available to cover the loss of communication satellites during
launching, space travel, or reentry. Bibliography: King, Josephine Y., No Fault Automobile Accident
Law (1987); Stevenson, M. K., Minnesota
No-Fault Automobile Insurance, 2 vols. (1990); U.
S. Government Printing Office, Compensating Auto Accident Victims (1985). John D.
Long Bibliography: Abromovitz, Les, Family Insurance Handbook: The Complete Guide for the 1990s (1990); Baldwin, Ben G., The Complete Book of Insurance: Protecting Your Life, Health, Property, and Income
(1989); Bickelhaupt, David L., and Bar-Nar,
Ran, International Insurance: Managing Risk
in the World (1983); Bobys, Neal, Insurance
in Plain English (1986); Cummins, J. David,
et al., Consumer Attitudes toward Auto and Homeowners Insurance (1984); Dacey, Norman F., What's Wrong with Your Life
Insurance? (1989); Insurance Information Institute, How to Get Your
Money's Worth in Home and Auto Insurance (1990); Long,
John D., Ethics, Morality, and Insurance (1970); Mehr,
Robert I., Fundamentals of Insurance, 2d ed. (1986); Nader, Ralph, and Smith, Wesley J., Winning the
Insurance Game (1990); Pieffer, Irving, and
Klock, David R., Perspectives on Insurance (1974); Reavis,
Marshall, Handbook of Insurance Terms and Concepts (1983). Life Insurance Life
insurance is a method by which numbers of individuals pool their funds so as to spread the
risk of financial loss from death equally among them.
Historically, the practice of life insurance dates back at least as far as the
Romans, whose burial clubs financed funeral expenses and made payments to families of the
deceased. A primitive mortality table
(calculations of risk of death for classes of people at certain ages) was constructed as
early as AD c.220, but it was only in 1693 that a true actuarial table was created by the
astronomer Edmond Halley, more than a century after the first modern life insurance policy
was issued (1583) in England. In the United
States the first life insurance company was established (1759) by the Presbyterian Synod
of Philadelphia for Presbyterian ministers, but life insurance did not become common until
the middle of the 19th century. A century
later life insurance was a vast industry. TYPES OF
LIFE INSURANCE The
three basic types of life-insurance contracts are term, whole life, and endowment. A related type is called an annuity. Term Insurance The
simplest type of policy is term insurance, in which the policyholder buys protection only
for the period of the contract, which may run from 1 to 20 years or more. Term insurance provides maximum protection for a
minimum outlay at a given time. If the
insured person dies within the period of the contract, the face value of the policy is
paid to a beneficiary. The premium, or cost,
of the term policy increases with the age of the insured. Whole Life Insurance A
policy that is bought to cover the whole lifetime of the insured is called whole life,
straight life, or ordinary life insurance. The
younger the age when a person takes out a policy, the lower the rate of premium. This premium remains constant, since it is based
on the expectation that the policy will be held for the person's lifetime. In early years the premium paid by the
policyholder is more than the true cost of the insurance (the financial risk to the
insurance company of a policyholder's death is more than covered by the premium rate), but
in later years it is less. Thus in early
years the policy builds up a cash value accruing from the difference between the premium
paid in and the true cost of the insurance. The
insured person can capture this cash value by borrowing on it or by discontinuing the
policy and getting a refund. Since insurance
companies invest the premiums paid in, they are required to guarantee the policyholder a
certain rate of interest on the cash value; for
this reason, whole life insurance requires lower cash outlay than other types of policies
over a person's lifetime. Endowment Insurance An
endowment policy is designed to accumulate savings over a period of years. Such a policy can be used to provide funds for a
child's education or for retirement. However,
it offers less protection in the event of early death than does a whole life policy. If the policyholder lives to a specific age he or
she will be paid the face value of the policy, and if the policyholder dies within the
period of the policy, the face value is also paid to a beneficiary. Annuities Closely
related to life insurance is the ANNUITY. While
life insurance may be said to protect against the risk of dying too young, an annuity
protects against living too long. It assures
that a person's accumulated funds will last for the remainder of his or her life. Thus a retired person with savings may decide to
purchase an annuity that guarantees a specific income for as long as he or she lives. The price of the annuity is based on the average
life expectancy for persons of a given age; those
who die earlier than the average are, in effect, paying to support those who live longer.
INSURANCE COMBINATIONS The
three basic types of life insurance can be combined in various ways, with one another and
with annuities, to fit many different requirements. Mortgage
insurance, for example, is a term insurance policy that decreases in value as a mortgage
is paid off, so that the policyholder's family will be able to continue mortgage payments
should the policyholder die. It may be
combined with another policy, such as whole life insurance, to provide additional income. When the combination is adjusted to the ages of
the policyholder's children it is called family insurance, since it guarantees a monthly
income while the children are growing up plus a permanent income for the surviving parent.
Benefits
may also take various forms. The beneficiary
may choose to take payment in a lump sum, or to have payments made regularly over a period
of time, or to use the proceeds to buy an annuity. Annuity An
annuity is, in its strict sense, a payment made every year; but it has come to mean
payments made at other regular intervals. Thus an annuity is a contract to pay someone a
regular income. For example, a person retiring at the age of 65 may purchase an annuity
from an insurance company, guaranteeing a monthly income for a fixed number of years or
for life. Life insurance policies often have a provision that at the age of retirement the
cash value of the insurance may be used to purchase an annuity. Purchasers of annuities
are, in effect, pooling their funds to insure themselves against "outliving"
their incomes. COSTS OF LIFE INSURANCE The
cost of a life insurance policy is affected by several factors: the amount and type of insurance being purchased,
the age of the insured, the administrative and selling expenses of the insurance company,
and the type of company from which it is purchased. Whole
life insurance requires the least cash outlay over a person's lifetime because part of its
cost is paid from the interest on the accumulated value of the policy. The interest rate guaranteed by the insurance
company is, however, quite conservative in comparison with the market rate of interest on
good investments. In theory, at least, a
person can obtain cheaper insurance by purchasing a term policy and combining it with a
personal program of saving and investment. Many
people, however, prefer the discipline of premium payments that require them to put aside
a regular amount each month. Insurance
companies vary in the amount of "loading"--the selling costs, administrative
expenses, reserves, and profits that they add to the net insurance rate. For identical policies, the premiums of different
companies may vary as much as 50 percent. Group
insurance is less expensive than an individual policy because the cost of selling and
servicing a group policy is much less. Individual
policies of comparable cost are available from savings banks in the states of
Massachusetts, New York, and Connecticut, where savings banks are allowed to sell life
insurance over the counter. They avoid much
of the advertising and sales expense of private companies. Let our associated broker assist you
with an evaluation and possible saving. Robert
S. Cline Bibliography: Consumer Reports Editors, The Consumers Union
Report on Life Insurance (1981); Greene, Mark
R., and Trieschman, James S., Risk and Insurance (1984);
Huebner, Solomon S., and Black, Kenneth, Jr., Life Insurance, 10th ed.
(1982); Institute of Life Insurance, Life
Insurance Fact Book (annual); Mehr, Robert
I., and Gustavson, Sandra G., Life Insurance: Theory
and Practice, 3d ed. (1984). Health
Insurance
Health insurance comprises all forms of insurance against financial loss resulting from illness or injury. These losses may include the expenses of hospitalization, surgery, and other medical service. The
most common health insurance coverage is for hospital care and usually covers physician
services in the hospital as well. More expensive coverage will include out-of-hospital
(office and home) medical care. The tremendous increase in the cost medical insurance
once again means the restructuring and exploring/investigation of cost effective
management systems. One of the bigger/larger cost factors in most
company's is staff benefits such as medical benefits. A saving on medical
contributions will most definitely have a substantial effect on your company's cash flow. Let our
associated broker assist you with an evaluation and possible saving. George A. Silver M.D Bibliography: Aaron, Henry J., Serious and Unstable Condition: Financing America's Health Care (1991); Anderson, O., Health Services in the U.S., 2d ed. (1990); Fein, R., Medical Care, Medical Costs (1986); Field, Marilyn J., and Shapiro, Harold T., Employment and Health Benefits: A Connection at Risk (1992); Fuchs, V., The Health Economy (1986); Gray, B., The Profit Motive and Patient Care (1991); Helms, Robert B., Health Care Policy and Politics: Lessons from Four Countries (1993); Hiatt, H. H., America's Health in the Balance (1987); Millman, Michael, Access to Health Care in America (1992); Silver, G. A., A Spy in the House of Medicine (1976); Starr, Paul, and Zelman, Walter, The Logic of Health-Care Reform (1993); Stevens, Rosemary, In Sickness and in Wealth (1989); Wolfe, John R., The Coming Health Crisis: How to Finance Care for the Aged in the Twenty-first Century (1992). |
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