What Is Insurance?

Insurance is a contract, represented by a policy, in which an individual or entity receives financial protection or reimbursement against losses from an insurance company. The company pools clients’ risks to make payments more affordable for the insured.

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Insurance policies are used to hedge against the risk of financial losses, both big and small, that may result from damage to the insured or her property, or from liability for damage or injury caused to a third party.




Understanding How Insurance Works

There is a multitude of different types of insurance policies available, and virtually any individual or business can find an insurance company willing to insure them—for a price. The most common types of personal insurance policies are auto, health, homeowners, and life. Most individuals in the United States have at least one of these types of insurance, and car insurance is required by law.

Businesses require special types of insurance policies that insure against specific types of risks faced by a particular business. For example, a fast food restaurant needs a policy that covers damage or injury that occurs as a result of cooking with a deep fryer. An auto dealer is not subject to this type of risk but does require coverage for damage or injury that could occur during test drives.

There are also insurance policies available for very specific needs, such as kidnap and ransom (K&R), medical malpractice, and professional liability insurance, also known as errors and omissions insurance.




Insurance Policy Components

When choosing a policy, it is important to understand how insurance works.

[Important: Three crucial components of insurance policies are the premium, policy limit, and deductible.]

A firm understanding of these concepts goes a long way in helping you choose the policy that best suits your needs.

Premium

A policy’s premium is its price, typically expressed as a monthly cost. The premium is determined by the insurer based on your or your business’s risk profile, which may include creditworthiness. For example, if you own several expensive automobiles and have a history of reckless driving, you will likely pay more for an auto policy than someone with a single mid-range sedan and a perfect driving record. However, different insurers may charge different premiums for similar policies. So finding the price that is right for you requires some legwork.




Policy Limit

The policy limit is the maximum amount an insurer will pay under a policy for a covered loss. Maximums may be set per period (e.g., annual or policy term), per loss or injury, or over the life of the policy, also known as the lifetime maximum.

Typically, higher limits carry higher premiums. For a general life insurance policy, the maximum amount the insurer will pay is referred to as the face value, which is the amount paid to a beneficiary upon the death of the insured.

Deductible

The deductible is a specific amount the policy-holder must pay out-of-pocket before the insurer pays a claim. Deductibles serve as deterrents to large volumes of small and insignificant claims. Deductibles can apply per-policy or per-claim depending on the insurer and the type of policy. Policies with very high deductibles are typically less expensive because the high out-of-pocket expense generally results in fewer small claims.

Special Considerations

With regard to health insurance, people who have chronic health issues or need regular medical attention should look for policies with lower deductibles. Though the annual premium is higher than a comparable policy with a higher deductible, less expensive access to medical care throughout the year may be worth the trade-off.

Key Takeaways

Insurance is a contract (policy) in which an insurer indemnifies another against losses from specific contingencies and/or perils.
There many types of insurance policies. Life, health, homeowners, and auto are the most common forms of insurance.
The components that make up most insurance policies are the deductible, policy limit, and premium.




What Is Reinsurance?

Reinsurance occurs when multiple insurance companies share risk by purchasing insurance policies from other insurers to limit their own total loss in case of disaster. Described as “insurance for insurance companies” by the Reinsurance Association of America, the idea is that no insurance company has too much exposure to a particularly large event or disaster.

KEY TAKEAWAYS

Reinsurance occurs when multiple insurance companies share risk by purchasing insurance policies from other insurers to limit their own total loss in case of disaster.
By spreading risk, an insurance company takes on clients whose coverage would be too great of a burden for the single insurance company to handle alone.
Premiums paid by the insured is typically shared by all of the insurance companies involved.
U.S. regulations require reinsurers to be financially solvent so they can meet their obligations to ceding insurers.
The Beginnings of Reinsurance
The Reinsurance Association of America states that the roots of reinsurance can be traced back to the 14th century when it was used for marine and fire insurance. Since then, it has grown to cover every aspect of the modern insurance market. There are companies that specialize in selling reinsurance in the United States, there are reinsurance departments in U.S. primary insurance companies, and there are reinsurers outside the United States that are not licensed in the United States. A ceding purchases reinsurance directly from a reinsurer or through a broker or reinsurance intermediary. 




How Reinsurance Works

By spreading risk, an individual insurance company can take on clients whose coverage would be too great of a burden for the single insurance company to handle alone. When reinsurance occurs, the premium paid by the insured is typically shared by all of the insurance companies involved.

If one company assumes the risk on its own, the cost could bankrupt or financially ruin the insurance company and possibly not cover the loss for the original company that paid the insurance premium.

For example, consider a massive hurricane that makes landfall in Florida and causes billions of dollars in damage. If one company sold all the homeowners insurance, the chance of it being able to cover the losses would be unlikely. Instead, the retail insurance company spreads parts of the coverage to other insurance companies (reinsurance), thereby spreading the cost of risk among many insurance companies.

Insurers purchase reinsurance for four reasons: To limit liability on a specific risk, to stabilize loss experience, to protect themselves and the insured against catastrophes, and to increase their capacity. But reinsurance can help a company by providing the following:

Risk Transfer: Companies can share or transfer specific risks with other companies.
Arbitrage: Additional profits can be garnered by purchasing insurance elsewhere for less than the premium the company collects from policyholders.
Capital Management: Companies can avoid having to absorb large losses by passing risk; this frees up additional capital.
Solvency Margins: The purchase of surplus relief insurance allows companies to accept new clients and avoid the need to raise additional capital.
Expertise: The expertise of another insurer can help a company obtain a higher rating and premium.
Reinsurance Regulation
U.S. reinsurers are regulated on a state-by-state basis. Regulations are designed to ensure solvency, proper market conduct, fair contract terms, rates, and to provide consumer protection. Specifically, regulations require the reinsurer to be financially solvent so that it can meet its obligations to ceding insurers.

ADVISOR INSIGHT
Peter J. Creedon, CFP®, ChFC®, CLU®
Crystal Brook Advisors, New York, NY

Reinsurance is a way a company lowers its risk or exposure to an untoward event. The idea is that no insurance company has too much exposure to a particular large event/disaster. If one company assumed the risk on its own, the cost would bankrupt or financially ruin the insurance company and possibly not cover the loss for the original company that paid the insurance premium.

As an example, a large hurricane makes landfall in Florida and causes billions of dollars in damage. If one company had sold all the homeowners insurance, the chance of covering the losses would be unlikely. Instead, the retail insurance company spreads parts of the coverage to other insurance companies (reinsurance), thereby spreading the cost of risk to many insurance companies.




Insurance Claim

What Is an Insurance Claim?

An insurance claim is a formal request by a policyholder to an insurance company for coverage or compensation for a covered loss or policy event. The insurance company validates the claim and, once approved, issues payment to the insured or an approved interested party on behalf of the insured.

Insurance claims cover everything from death benefits on life insurance policies to routine and comprehensive medical exams. In many cases, third-parties file claims on behalf of the insured person, but usually, only the person(s) listed on the policy is entitled to claim payments.

KEY TAKEAWAYS
An insurance claim is a formal request by a policyholder to an insurance company for coverage or compensation for a covered loss or policy event.
The insurance company validates the claim and, once approved, issues payment to the insured or an approved interested party on behalf of the insured.
For property casualty insurance, such as for your car or home, filing a claim can cause rate hikes to your future premiums.





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Insurance Claim

How an Insurance Claim Works

A paid insurance claim serves to indemnify a policyholder against financial loss. An individual or group pays premiums as consideration for completion of an insurance contract between the insured party and an insurance carrier. The most common insurance claims involve costs for medical goods and services, physical damage and liability resulting from the operation of automobiles, property damage and liability for dwellings (homeowners, landlords, and renters), and the loss of life.




For property and causality insurance policies, regardless of the scope of an accident or who was at fault, the number of insurance claims you file has a direct impact on your rates. The greater the number of claims filed, the greater the likelihood of a rate hike. File too many claims and the insurance company may not renew your policy.

If the claim is being filed based on the damage you caused, your rates will almost surely rise. On the other hand, if you aren’t at fault, your rates may or may not increase. Getting hit from behind when your car is parked or having siding blow off your house during a storm are clearly not your fault and may not result in rate hikes, but this isn’t always the case. Mitigating circumstances, such as the number of previous claims you have filed, the number of speeding tickets you have received, the frequency of natural disasters in your area (earthquakes, hurricanes, floods) and even a low credit rating can all cause your rates to go up, even if the latest claim was made for damage you didn’t cause.

When it comes to rate hikes, not all claims are created equal. Dog bites, slip-and-fall personal injury claims, water damage, and mold are red flag items to insurers. These items tend to have a negative impact on your rates and on your insurer’s willingness to continue providing coverage. Surprisingly, the much-dreaded speeding ticket may not cause a rate hike at all. Many companies forgive the first ticket. The same goes for a minor automobile accident or a small claim against your homeowner’s insurance policy.




Health Insurance Claims

Costs for surgical procedures or inpatient hospital stays remain prohibitively expensive. In 2014, the US average cost for a one-day hospital stay was $2,212. Individual or group health policies indemnify patients against financial burdens that may otherwise cause crippling financial damage. Health insurance claims filed with carriers by providers on behalf of policyholders require little effort from patients; 94% of medical claims were adjudicated electronically in 2011, representing a 19% increase from 2006.

Policyholders must file paper claims when medical providers do not participate in electronic transmittals but charges result from rendered covered services. Ultimately, an insurance claim protects an individual from the prospect of large financial burdens resulting from an accident or illness.

Property and Casualty Claims

A house is typically one of the largest assets an individual will purchase in his/her lifetime. A claim filed for damage from covered perils is initially routed via phone or the internet to a representative of an insurer, commonly referred to as an agent or claims adjuster.

Unlike health insurance claims, the onus is on the policyholder to report damage of a deeded property he owns. An adjuster, depending on the type of claim, inspects and assesses damage to property for payment to the insured. Upon verification of the damage, the adjuster initiates the process of compensating or reimbursing the insured.




Life Insurance Claims

Life insurance claims require the submission of a claim form, a death certificate, and oftentimes the original policy. The process, especially for large face value policies, may require in-depth examination by the carrier to ensure that the death of the insured did not fall under a contract exclusion, such as suicide (usually excluded for the first few years after policy inception) or death resulting from a criminal act.

Generally, the process takes approximately 30 to 60 days without extenuating circumstances, affording beneficiaries the financial wherewithal to replace the income of the deceased or simply cover the burden of final expenses.

Filing an insurance claim may raise future insurance premiums.
To File or Not to File an Insurance Claim?
There are no hard-and-fast rules around rate hikes. What one company forgives, another won’t forget. Because any claim at all may pose a risk to your rates, understanding your policy is the first step toward protecting your wallet. If you know your first accident is forgiven or a previously filed claim won’t count against you after a certain number of years, the decision of whether or not to file a claim can be made with advance knowledge of the impact it will or won’t have on your rates.

Talking to your agent about the insurance company’s policies long before you need to file a claim is also important. Some agents are obligated to report you to the company if you even discuss a potential claim and choose not to file. For this reason, you also don’t want to wait until you need to file a claim to inquire about your insurer’s policy regarding consultation with your agent.

Regardless of your situation, minimizing the number of claims you file is the key to protecting your insurance rates from a substantial increase. A good rule to follow is to only file a claim in the event of catastrophic loss. If your car gets a dent on the bumper or a few shingles blow off of the roof on your house, you may be better off if you take care of the expense on your own.

If your car is totaled in an accident or the entire roof of your house caves in, filing a claim becomes a more economically feasible exercise. Just keep in mind that even though you have coverage and have paid your premiums on time for years, your insurance company can still decline to renew your coverage when your policy expires.




World’s Top 10 Insurance Companies

We all face different risks—the risk of meeting with an accident, falling sick, being the victim of a natural disaster or fire, and, above all, the risk of life. All these risks not only come with pain and suffering, but they also hurt financially. Insurance is one way of being prepared for the worst. It offers the surety that the economic part of the pain will be taken care of.

In this article, we take a look at some of the world’s top insurance companies. There are many criteria on the basis of which such a list can be prepared: premium collections, revenue, profit, geographical area, assets, and more. The following list focuses on market capitalization, with companies listed in alphabetical order. Financial figures are current as of year-end 2019.[cite] Market capitalizations are through February, 2020.

KEY TAKEAWAYS
Insurance companies protect consumers after accidents, natural disasters, fire, and against life events.
The top two companies by market cap are Berkshire Hathaway with $514.57 billion and Ping An of China with $243.57 billion.
AIG was one of the financial services and insurance companies embroiled in the financial crisis of 2007–2008, receiving a government bailout of $180 billion.
UnitedHealth, with a market cap of $221.43 billion, provides health benefits and health services for more than 115 million people.




AIA Group Ltd

AIA Group was founded in 1919 in Singapore and is currently headquartered in Hong Kong. It is the largest pan-Asian life insurance group, with a presence in 18 different markets including China, Australia, New Zealand, India, and Cambodia. It specializes in life insurance and other financial services.

As of Dec. 31, 2018, AIA reportedly had assets of $230 billion and a market cap of $123.4 billion as of February 5, 2020.

AIG

AIG, or American International Group, has offices in 80 different countries. The company, founded in Shanghai in 1919, is currently headquartered in New York City. It mainly operates in three segments including general insurance (commercial and personal insurance), life, and retirement, as well as a technology subsidiary called Blackboard Insurance.

You’ll probably recognize the name as one of the companies that received a bailout of $180 billion from the U.S. government following the 2007–2008 financial crisis. According to the Financial Crisis Inquiry Commission, credit default swaps were sold without collateral, causing AIG to fail.

The company has since recovered, reporting $492 billion in assets, and a market cap of $63.8 billion.




Allianz SE

Founded in 1890, Allianz is a leading financial services company, providing products and services from insurance to asset management.

Allianz caters to customers in more than 70 countries. Insurance products range from property and casualty products to health and life insurance products for corporate and individual customers. The company is headquartered in Germany. Allianz’s market cap stands at $103 billion.




AXA

With over 102 million customers in 56 countries and an employee base of more than 125,000, AXA is one of the world’s leading insurance groups. Its main businesses are property and casualty insurance, life insurance, savings, and asset management. It was founded in 1816 when several insurance companies merged to create AXA. The company is headquartered in Paris but has a presence across Africa, North America, Central, and South America, Asia Pacific, Europe, and the Middle East.

AXA acquired 51% of the insurance operations of Colpatria Seguros in Colombia in 2013. During the same year, it became the largest international insurer operating in China as a result of its 50% acquisition of Tian Ping (a Chinese property and casualty insurer). AXA also acquired the non-life insurance operations of HSBC in Mexico. The market cap for the AXA Group is currently around $65.6 billion.




Berkshire Hathaway

Berkshire Hathaway (BRK.A) was founded in 1889 and is associated with Warren Buffet, who has transformed a mediocre entity into one of the largest companies in the world.

Berkshire Hathaway is now a leading investment manager conglomerate, engaging in insurance, among other sectors such as rail transportation, finance, utilities and energy, manufacturing, services, and retail through its subsidiaries.

Warren Buffet began buying stock in Berkshire Hathaway in the 1960s.
It provides primary insurance, as well as reinsurance of property and casualty risks. Companies like Berkshire Hathaway Reinsurance Group, GEICO, Berkshire Hathaway Primary Group, General Re, National Indemnity Company, Medical Protective Company, Applied Underwriters, U.S. Liability Insurance Company, Central States Indemnity Company and the Guard Insurance Group are Berkshire subsidiaries.

The company’s market cap has reached a record $557.2 billion with total assets of over $707 billion.

China Life Insurance

China Life Insurance (LFC) is one of Mainland China’s largest state-owned insurance and financial services companies, as well as a key player in the Chinese capital market as an institutional investor.

The company was founded in 1949 when the People’s Insurance Company of China (PICC) was formed. Its offshoot PICC (Life) Co. Ltd was created after parting ways with PICC in 1996. PICC (Life) Co. Ltd was renamed as China Life Insurance Company in 1999. The China Life Insurance Company was restructured in 2003 as China Life Insurance (Group) Company, which has seven subsidiaries. The businesses are spread across life insurance, pension plans, asset management, property and casualty, investment holdings, and overseas operations.

The company is listed on the New York Stock Exchange, the Hong Kong Stock Exchange, and the Shanghai Stock Exchange and is the biggest public life insurance company in terms of market capitalization in the world. The company boasts a market cap of $110 billion.




ING Group

Dutch multinational ING Group was founded in 1991. The company provides a range of services including retail, direct, commercial, and investment banking, insurance, and asset management. ING serves more than 37 million clients in over 40 different countries.

In 2018, ING announced a partnership with another member of this list—AXA. Together, the two have an exclusive, multi-country digital partnership to provide insurance products to clients online through a centralized platform. ING’s market cap is around $44.4 billion.




Ping An of China

Ping An of China deals primarily with insurance, financial services, and banking. It is is one of the top 50 companies listed on the Shanghai Stock Exchange. Founded in 1988, it was China’s first company to adopt a shareholding structure.

The company, headquartered in Shenzhen, China, is one of the world’s most valuable insurance companies and one of the largest asset management and investment companies in the world. Its subsidiaries include Ping An Life, Ping An Property & Casualty, Ping An Annuity, and Ping An Health. The company’s market cap is $211.2 billion.




Prudential Financial

Prudential dates back to 1875, when it was established to sell burial insurance to working class folks in Newark, NJ. Today the company boasts a balance sheet with assets exceeding $815 billion and a market cap of $39 billion.

MetLife

Serving more than 90 million customers in more than 60 countries, MetLife has a market cap of $47.4 billion and assets of $687.5 billion. It is one of the world’s largest insurers and also provides services in employee benefits and annuities.

The company’s affiliates and subsidiaries include MetLife Investors, MetLife Bank—which was sold to GE Capital in 2013—MetLife Securities, Metropolitan Property, and Casualty Insurance Company.

MetLife ended its more than 30-year partnership with the Peanuts—whose characters were used in the company’s branding—in 2019.




United Health Group

The UnitedHealth Group (UNH) is among one of the most diversified health care businesses in the United States. Its two business platforms—UnitedHealthcare for health benefits and Optum for health services—work together, serving more than 115 million people in every U.S. state and 125 countries.

The UnitedHealth Group uses its experience and resources in clinical care to improve the performance of the health care services sector.

The company’s market cap was $278.8 billion on February 5, 2020.

The Bottom Line

Picking the right insurance company to invest in is important and should not be based on a company’s size alone. A few things on your checklist should be the company’s rating, its financial strength if the company specializes in any particular type of insurance, refusal of claims in the past, the proximity of office, premium rates, and discounts offered on multiple policies.