Insurance is a means of protection against financial loss, whereby, in exchange for a fee, one party agrees to compensate another in the event of a specified loss, damage, or injury. It is a form of risk management, primarily employed to guard against the possibility of a contingent or uncertain loss.

An entity that provides insurance is referred to as an insurer, insurance company, insurance carrier, or underwriter. A person or entity that purchases insurance is known as the policyholder, while a person or entity covered under the policy is called the insured. The insurance arrangement involves the policyholder assuming a known, guaranteed, and relatively modest loss in the form of a payment to the insurer (the premium) in return for the insurer’s promise to compensate the insured in the event of a covered loss. The loss may not necessarily be financial, but it must be quantifiable in monetary terms. Additionally, it usually involves an asset or interest in which the insured has an insurable interest, established through ownership, possession, or a pre-existing relationship.

The insured receives a contract, known as the insurance policy, which sets out the conditions and circumstances under which the insurer will compensate the insured, or their nominated beneficiary or assignee. The sum charged by the insurer to the policyholder for the coverage specified in the policy is referred to as the premium. Should the insured suffer a loss potentially covered by the policy, they submit a claim to the insurer for assessment by a claims adjuster. A compulsory out-of-pocket expense required under an insurance policy before the insurer will settle a claim is known as a deductible or excess (or, in the case of certain health insurance policies, a copayment). The insurer may mitigate its own risk by obtaining reinsurance, whereby another insurance company agrees to assume part of the risk, particularly if the primary insurer considers the exposure too great to bear alone.

Table of Contents

History

Early Methods

Methods for transferring or distributing risk were practiced by Chinese and Indian traders as far back as the 3rd and 2nd millennia BC, respectively. Chinese merchants navigating treacherous river rapids would redistribute their goods across multiple vessels to limit the loss in the event of any single vessel capsizing.

Codex Hammurabi, Law 238 (c. 1755–1750 BC), stipulated that a sea captain, ship-manager, or ship charterer who saved a ship from total loss was only required to pay half the value of the ship to its owner. In the Digesta seu Pandectae (533), the second volume of the codification of laws ordered by Justinian I (527–565), a legal opinion written by the Roman jurist Paulus in 235 AD was included concerning the Lex Rhodia (“Rhodian law”). This codified the general average principle of marine insurance, established on the island of Rhodes around 1000–800 BC, plausibly by the Phoenicians during the proposed Dorian invasion and the emergence of the so-called Sea Peoples in the Greek Dark Ages (c. 1100–c. 750 BC).

The law of general average forms the fundamental principle underlying all insurance. In 1816, an archaeological excavation in Minya, Egypt, uncovered a Nerva–Antonine dynasty-era tablet from the ruins of the Temple of Antinous in Antinoöpolis, Aegyptus. The tablet prescribed the rules and membership dues of a burial society (collegium) established in Lanuvium, Italia, around 133 AD during the reign of Hadrian (117–138) of the Roman Empire. In 1851, future U.S. Supreme Court Associate Justice Joseph P. Bradley (1870–1892), who had previously worked as an actuary for the Mutual Benefit Life Insurance Company, submitted an article to the Journal of the Institute of Actuaries. His article provided a historical account of a Severan dynasty-era life table compiled by the Roman jurist Ulpian around 220 AD, which was also included in the Digesta.

Concepts of insurance are also found in 3rd century BC Hindu scriptures such as the Dharmasastra, Arthashastra, and Manusmriti. The ancient Greeks practised marine loans, whereby money was advanced on a ship or cargo to be repaid with considerable interest if the voyage prospered. If the ship were lost, however, the money would not be repaid at all, making the rate of interest sufficiently high to cover not only the use of capital but also the risk of its loss—a practice fully described by Demosthenes. Loans of this nature have remained common in maritime regions under the names of bottomry and respondentia bonds.

Direct insurance of sea-risks, paid independently of loans, began in Belgium around 1300 AD.

Separate insurance contracts—that is, policies not bundled with loans or other forms of contract—were developed in Genoa in the 14th century, along with insurance pools backed by pledges of landed estates. The earliest known insurance contract dates from Genoa in 1347. By the following century, maritime insurance had become widespread, with premiums adjusted according to the level of risk. These new contracts allowed insurance to be separated from investment, a distinction that first proved particularly useful in marine insurance.

The earliest known policy of life insurance was issued at the Royal Exchange, London, on 18 June 1583, for £383, 6s. 8d., covering twelve months on the life of William Gibbons.

Modern methods

Insurance became far more sophisticated in Enlightenment-era Europe, giving rise to specialised varieties.

Property insurance, as we understand it today, can be traced to the Great Fire of London in 1666, which destroyed over 13,000 houses. The devastating effects of the fire transformed the development of insurance “from a matter of convenience into one of urgency, a change reflected in Sir Christopher Wren’s inclusion of a site for ‘the Insurance Office’ in his new plan for London in 1667.” Several attempted fire insurance schemes failed, but in 1681, economist Nicholas Barbon and eleven associates established the first fire insurance company, the Insurance Office for Houses, at the rear of the Royal Exchange, to insure brick and frame homes. Initially, 5,000 homes were covered by his Insurance Office.

Simultaneously, the first insurance schemes for underwriting business ventures became available. By the end of the seventeenth century, London’s growth as a centre for trade increased the demand for marine insurance. In the late 1680s, Edward Lloyd opened a coffee house that became a meeting place for parties in the shipping industry wishing to insure cargoes and ships, including those willing to underwrite such ventures. These informal beginnings ultimately led to the establishment of the insurance market Lloyd’s of London, alongside several related shipping and insurance enterprises.

Life insurance policies began to be taken out in the early eighteenth century. The first company to offer life insurance was the Amicable Society for a Perpetual Assurance Office, founded in London in 1706 by William Talbot and Sir Thomas Allen. Upon the same principle, Edward Rowe Mores established the Society for Equitable Assurances on Lives and Survivorship in 1762.

It was the world’s first mutual insurer and pioneered age-based premiums determined by mortality rates, laying “the framework for scientific insurance practice and development” and “the basis of modern life assurance upon which all life assurance schemes were subsequently based.”

In the late nineteenth century, “accident insurance” began to emerge. The first company to offer accident insurance was the Railway Passengers Assurance Company, formed in England in 1848 to provide coverage against the rising number of fatalities on the nascent railway system.

The first international insurance rules were the York-Antwerp Rules (YAR) for the distribution of costs between ship and cargo in the event of general average. In 1873, the Association for the Reform and Codification of the Law of Nations, the precursor of the International Law Association (ILA), was founded in Brussels. It published the first YAR in 1890 and adopted the present title of the International Law Association in 1895.

By the late nineteenth century, governments began to introduce national insurance programmes against sickness and old age. Germany built upon a tradition of welfare programmes in Prussia and Saxony that dated back to the 1840s. In the 1880s, Chancellor Otto von Bismarck introduced old-age pensions, accident insurance, and medical care, which formed the basis of Germany’s welfare state. In Britain, more extensive legislation was enacted by the Liberal government in the National Insurance Act 1911, providing the British working classes with the first contributory system of insurance against illness and unemployment. This system was greatly expanded after the Second World War, under the influence of the Beveridge Report, to establish the first modern welfare state.

In 2008, the International Network of Insurance Associations (INIA), then an informal network, became active and was later succeeded by the Global Federation of Insurance Associations (GFIA), formally founded in 2012. Its purpose is to enhance the insurance industry’s effectiveness in providing input to international regulatory bodies and to contribute more effectively to the global dialogue on issues of common interest. It comprises 40 member associations and one observer association across 67 countries, representing companies responsible for around 89% of total insurance premiums worldwide.

Principles

Insurance involves pooling funds from numerous insured entities (known as exposures) to cover the losses that only some may incur. The insured are therefore protected from risk in return for a fee, which is determined by the frequency and severity of the event occurring. For a risk to be insurable, it must possess certain characteristics. Insurance, as a financial intermediary, is a commercial enterprise and a significant component of the financial services industry; however, individual entities may also self-insure by setting aside funds to cover potential future losses.

Insurability

Risk that can be insured by private companies typically shares seven common characteristics:

A large number of similar exposure units – Insurance operates by pooling resources, with most policies covering individual members of large classes. This allows insurers to benefit from the law of large numbers, whereby predicted losses approximate actual losses. Exceptions include Lloyd’s of London, which is renowned for insuring the lives or health of actors, sports figures, and other prominent individuals. Nonetheless, all exposures differ in certain respects, potentially leading to varying premium rates.
Definite loss – The loss must occur at a known time and place from a known cause. A classic example is the death of an insured individual under a life insurance policy. Fire, automobile accidents, and workplace injuries usually meet this criterion. Other losses, such as occupational diseases, may only be definite in theory, involving prolonged exposure to harmful conditions where no specific time, place, or cause can be identified. Ideally, the time, place, and cause of a loss should be sufficiently clear that a reasonable person, with adequate information, could objectively verify all three elements.
Accidental loss – The event triggering a claim should be fortuitous or beyond the control of the policyholder. The loss should be pure, arising solely from an event that creates a potential cost. Events involving speculation, such as ordinary business risks or lottery participation, are generally not considered insurable.
Large loss – The size of the loss must be significant from the insured’s perspective. Premiums must cover both the expected cost of losses and the expenses of issuing and administering policies, adjusting claims, and supplying sufficient capital to ensure the insurer can meet its obligations. For minor losses, these additional costs may exceed the expected loss, making insurance economically impractical unless the coverage has genuine value to the policyholder.
Affordable premium – If the likelihood of an insured event is very high, or the cost of the event so substantial, that the resulting premium is large relative to the protection offered, insurance is unlikely to be purchased, even if available. Furthermore, as recognised in financial accounting standards, the premium cannot be so high that there is no reasonable chance of a significant loss to the insurer. If no such risk exists, the transaction may resemble insurance in form but not in substance.
Calculable loss – Two elements must be at least estimable, if not precisely calculable: the probability of loss and its likely cost. Probability is generally determined empirically, while cost requires that a reasonable person, armed with a copy of the policy and proof of loss, can make a reasonably objective evaluation of the amount recoverable.
Limited risk of catastrophically large losses – Insurable losses should ideally be independent and non-catastrophic, meaning they do not occur simultaneously and individual losses are not sufficient to bankrupt the insurer. Insurers often limit exposure to losses from a single event to a small fraction of their capital base. Capital constraints restrict the provision of earthquake insurance or hurricane coverage in high-risk zones. In the United States, the federal government insures flood risk in designated areas. For commercial fire insurance, properties with values exceeding an individual insurer’s capital are generally shared among multiple insurers or insured by a single insurer that syndicates the risk into the reinsurance market.

Legal Principles

When a company provides insurance to an individual or entity, certain legal requirements and regulations apply. Commonly cited legal principles include:

Indemnity – The insurer compensates the insured for covered losses only up to the insured’s interest.
Benefit insurance – As noted in Chartered Insurance Institute study materials, the insurer does not have the right to recover from the party causing the injury and must compensate the insured regardless of whether the insured has already sued the negligent party (e.g., personal accident insurance).
Insurable interest – The insured must typically suffer directly from the loss. Whether property or life insurance, the insured must have a “stake” in the loss or damage, which distinguishes insurance from gambling.
Utmost good faith (Uberrima fides) – Both insured and insurer are bound by a duty of honesty and fairness. Material facts must be disclosed.
Contribution – When multiple insurers have similar obligations, they share indemnification according to an agreed method.
Subrogation – The insurer acquires the legal right to pursue recoveries on behalf of the insured, such as suing those responsible for the loss. Insurers may waive this right through specific policy clauses.
Causa proxima, or proximate cause – The cause of loss (the peril) must be covered under the policy, and the dominant cause must not be excluded.
Mitigation – In the event of loss or damage, the asset owner must take reasonable steps to minimise the loss, as if the asset were not insured.

Indemnification

To “indemnify” means to restore someone to the position they were in, as far as possible, prior to the occurrence of a specified event or peril. Accordingly, life insurance is generally not considered indemnity insurance, but rather “contingent” insurance, in which a claim arises upon the occurrence of a specified event. There are generally three types of insurance contracts that aim to indemnify the insured:

A “reimbursement” policy
A “pay on behalf” policy
An “indemnification” policy

From the insured’s perspective, the outcome is usually the same: the insurer covers the loss and any associated claims expenses.

Under a reimbursement policy, the insured may be required to pay for the loss initially and then be reimbursed by the insurer for the loss and out-of-pocket expenses, including, with the insurer’s consent, claims-related costs.

Under a pay on behalf policy, the insurer directly defends and settles the claim on behalf of the insured, who does not incur any out-of-pocket costs. Most modern liability insurance is written on a pay-on-behalf basis, enabling the insurer to manage and control the claims process.

Under an indemnification policy, the insurer can generally choose either to reimburse the insured or to pay on their behalf, whichever is more advantageous for both parties during claim handling.

An entity seeking to transfer risk—whether an individual, corporation, or association—becomes the insured once the risk is assumed by the insurer through a contract known as an insurance policy. Typically, an insurance contract includes, at a minimum: identification of the parties involved (insurer, insured, beneficiaries), the premium, the coverage period, the specific loss events covered, the amount of coverage (i.e., the sum payable to the insured or beneficiary in the event of a loss), and any exclusions. In this way, the insured is said to be indemnified against losses specified in the policy.

When an insured suffers a loss due to a specified peril, the policy entitles the policyholder to submit a claim to the insurer for the covered amount. The fee paid by the insured for the insurer assuming the risk is called the premium. Premiums collected from many insured parties fund accounts reserved for the payment of claims—typically for a relatively small number of claimants—and for administrative expenses. Provided the insurer maintains sufficient funds for anticipated losses (known as reserves), the remaining balance represents the insurer’s profit.

Exclusions

Policies generally contain several exclusions, for example:

Nuclear exclusion clause – excluding damage caused by nuclear or radiation incidents.
War exclusion clause – excluding damage resulting from acts of war or terrorism.

Insurers may also prohibit certain activities deemed excessively hazardous and therefore excluded from coverage. One method for classifying activities according to insurer approval uses a “traffic light” system:

Green light – approved activities and events.
Yellow light – activities and events requiring insurer consultation and/or waivers of liability.
Red light – prohibited activities and events outside the scope of insurance cover.

Social Effects

Insurance can have a variety of effects on society by altering who bears the cost of losses and damage. On one hand, it can increase the potential for fraud; on the other, it helps individuals and societies prepare for catastrophes and mitigates the impact of such events on households and communities.

Insurance can influence the likelihood of losses through moral hazard, insurance fraud, and preventive measures implemented by the insurer. Scholars of insurance generally use moral hazard to describe increased losses resulting from unintentional carelessness, and insurance fraud to denote increased risk arising from deliberate negligence or indifference. Insurers attempt to address carelessness through inspections, policy provisions requiring specific types of maintenance, and by offering possible discounts for proactive loss mitigation.

While insurers could, in theory, encourage investment in loss reduction, some commentators have argued that historically insurers have not aggressively pursued such measures—particularly for disaster risks, such as hurricanes—due to concerns over rate reductions and legal disputes. However, since around 1996, insurers have begun to take a more active role in loss mitigation, for example through the enforcement of building codes.

Methods of Insurance

According to the study materials of the Chartered Insurance Institute, the main methods of insurance are as follows:

Co-insurance – the sharing of risks between insurers (sometimes referred to as “retention”).
Dual insurance – holding two or more policies covering the same risk. Both policies do not pay separately; under the principle of contribution, they share liability to cover the policyholder’s losses. However, in the case of contingency insurance, such as life insurance, dual payment may be permitted.
Self-insurance – situations in which risk is not transferred to an insurance company but is retained entirely by the entity or individual.
Reinsurance – situations in which an insurer transfers part or all of its risks to another insurer, known as the reinsurer.

Insurers’ Business Model

Insurers often operate using a subscription-based business model, collecting premium payments periodically in return for ongoing and/or compounding benefits provided to policyholders.

Insurance Premium

The core aim of an insurer’s business model is to collect more in premiums than is paid out in claims, while offering a competitive price acceptable to consumers. At a basic level, the insurance premium can be expressed as:

Insurance premium = expected value of claims + underwriting expenses + operating costs + profit − return on investment

Estimating insurance premiums fundamentally involves assessing the frequency of claims and the expected value of payouts for these claims. The most complex aspect of insuring is the actuarial science of ratemaking (policy pricing), which uses statistics and probability to project the rate of future claims for a given risk.

Once rates are produced, the insurer exercises discretion in accepting or rejecting risks through the underwriting process. Historical loss data is collected, adjusted to present value, and compared to premiums previously collected to evaluate rate adequacy. Loss ratios and expense loads are also considered. At a basic level, rating different risk characteristics involves comparing losses with “loss relativities”—for example, a policy with twice the expected losses would be charged twice as much. More sophisticated multivariate analyses are employed when multiple characteristics are involved, as simple univariate methods can produce misleading results. Other statistical techniques may also be applied to estimate the probability of future losses.

Upon termination of a policy, the amount of premiums collected minus the claims paid constitutes the insurer’s underwriting profit for that policy. Underwriting performance is measured using the combined ratio, the ratio of expenses and losses to premiums. A combined ratio below 100% indicates an underwriting profit, while a ratio above 100% reflects an underwriting loss.

Sources of Profit

Insurers generate revenue in two primary ways:

Underwriting – the process of selecting risks to insure, determining the appropriate premiums for those risks, and assuming liability should the risk materialise.
Investment of premiums – insurers invest the premiums they collect from policyholders until claims are paid.

A company with a combined ratio above 100% may still remain profitable due to investment earnings. The insurer earns investment profits on the float—the sum of premiums collected but not yet paid out in claims. Insurers begin investing premiums immediately upon collection and continue to earn returns until claims are settled. The Association of British Insurers, representing 400 insurance companies and 94% of UK insurance services, holds almost 20% of investments on the London Stock Exchange.

For example, in 2007, the US insurance industry earned profits from float totalling $58 billion. In a 2009 letter to investors, Warren Buffett noted, “we were paid $2.8 billion to hold our float in 2008.”

In the United States, property and casualty insurers recorded an underwriting loss of $142.3 billion over the five years ending 2003. Yet overall profit for the same period was $68.4 billion due to earnings from float. Some industry insiders, notably Hank Greenberg, argue that relying on float alone is unsustainable without underwriting profits, though this view is not universally held. Dependence on float has led some experts to describe insurers as “investment companies that raise funds for investment by selling insurance.”

Naturally, the float method is more challenging during economic downturns, which often forces insurers to reduce investments and adopt stricter underwriting standards. Consequently, a weak economy typically leads to higher insurance premiums. This fluctuation between profitable and unprofitable periods is commonly referred to as the underwriting cycle, or insurance cycle.

Claims

Claims and loss handling constitute the realised utility of insurance; they represent the actual “product” for which policyholders pay. Claims may be submitted by insured parties directly to the insurer or via brokers or agents. The insurer may require claims to be filed on proprietary forms or may accept standard industry forms, such as those produced by ACORD.

Insurance company claims departments employ a large number of claims adjusters, supported by staff handling records management and data entry. Incoming claims are categorised according to severity and assigned to adjusters, whose authority to settle claims varies with their knowledge and experience. An adjuster investigates each claim, usually in close collaboration with the insured, determines whether coverage exists under the terms of the insurance policy, assesses the reasonable monetary value of the claim, and authorises payment.

Policyholders may appoint their own public adjusters to negotiate settlements with the insurer on their behalf. For complex policies, where claims may be intricate, the insured may purchase an additional policy endorsement, known as loss recovery insurance, which covers the cost of a public adjuster in the event of a claim.

Adjusting liability insurance claims is particularly challenging, as it involves a third party—the plaintiff—who is under no contractual obligation to cooperate with the insurer and may, in fact, perceive the insurer as a “deep pocket.” The adjuster must engage legal counsel for the insured—either in-house or external (“panel”) counsel—monitor litigation that may take years to resolve, and attend settlement conferences in person or via telephone with settlement authority when required by the court.

If an adjuster suspects underinsurance, the condition of average may apply to limit the insurer’s exposure.

In managing the claims-handling function, insurers aim to balance customer satisfaction, administrative costs, and losses due to claims overpayment. In addition, fraudulent insurance practices represent a major business risk that insurers must manage and mitigate. Disputes between insurers and insured parties over the validity of claims or claims-handling procedures can occasionally escalate to litigation (see insurance bad faith).

Marketing

Insurers often employ insurance agents to initially market and underwrite policies. Agents may be captive, issuing policies solely for one company, or independent, able to issue policies from multiple insurers. The success of companies using agents is largely attributed to the availability of personalised and improved services.

Insurers also utilise broking firms, banks, and other corporate entities—such as self-help groups, microfinance institutions, and NGOs—to market their products.

Types of Insurance

Any risk that can be quantified has the potential to be insured. Specific risks that may give rise to claims are referred to as perils. An insurance policy will specify in detail which perils are covered and which are excluded. The lists below provide a non-exhaustive overview of the many different types of insurance available. A single policy may cover risks across one or more of the categories listed.

For example, vehicle insurance typically covers both property risk (theft or damage to the vehicle) and liability risk (legal claims arising from an accident). A home insurance policy in the United States generally provides coverage for damage to the home and the owner’s belongings, certain legal claims against the owner, and, in some cases, a modest amount of coverage for medical expenses of guests injured on the property.

Business insurance can take several forms, such as the various types of professional liability insurance, also known as professional indemnity (PI), discussed below under that term; and the business owner’s policy (BOP), which combines many of the coverages a business owner requires into a single policy, in a manner analogous to how homeowners’ insurance bundles coverages for a homeowner.

Vehicle Insurance

Vehicle insurance protects the policyholder against financial loss in the event of an incident involving a vehicle they own, such as a traffic collision. Coverage typically includes:

Property coverage – for damage to or theft of the vehicle
Liability coverage – for legal responsibility to others for bodily injury or property damage
Medical coverage – for the costs of treatment, rehabilitation, and sometimes lost wages and funeral expenses

Gap Insurance

GAP (Guaranteed Asset Protection) insurance covers the outstanding amount on an auto loan if the policyholder’s insurance does not cover the full loan. Depending on the insurer’s policies, it may or may not cover the deductible. This coverage is often recommended for those who make a low down payment, have high interest rates on their loans, or take out long-term loans of 60 months or more.

Gap insurance is typically offered by finance companies at the point of vehicle purchase, though many auto insurers also provide this coverage directly to policyholders.

Health Insurance

Health insurance policies cover the costs of medical treatment. Similarly, dental insurance protects policyholders against dental expenses. In most developed countries, all citizens receive some form of health coverage from the government, typically funded through taxation. In many countries, health insurance is also provided as part of an employer’s benefits package.

Income Protection Insurance

Disability insurance provides financial support if the policyholder becomes unable to work due to illness or injury. It typically offers monthly payments to help cover obligations such as mortgage repayments and credit card bills. Short-term and long-term disability policies are available to individuals. Given their cost, long-term policies are generally purchased only by those with high incomes, such as doctors, lawyers, and other professionals. Short-term disability insurance generally covers a period of up to six months, paying a monthly stipend to cover medical expenses and other necessities.
Long-term disability insurance covers an individual’s expenses for an extended period, continuing until they are considered permanently disabled. Insurers often encourage individuals to return to work before declaring them fully and permanently unable to work.
Disability overhead insurance enables business owners to cover the overhead costs of their business while they are unable to work.
Total permanent disability insurance provides benefits when an individual is permanently disabled and can no longer work in their profession. This is often purchased as an adjunct to life insurance.
Workers’ compensation insurance replaces all or part of a worker’s lost wages and covers medical expenses arising from a job-related injury.

Casualty Insurance

Casualty insurance covers accidents and events not necessarily linked to specific property. It encompasses a broad range of insurance types, including motor insurance, workers’ compensation, and certain liability insurances.

Crime insurance protects the policyholder against losses resulting from criminal acts by third parties. For instance, a company may take out crime insurance to cover losses from theft or embezzlement.
Terrorism insurance provides protection against losses or damage caused by terrorist acts. In the United States, following 9/11, the Terrorism Risk Insurance Act 2002 (TRIA) established a federal programme to provide a transparent system of shared public and private compensation for insured losses resulting from acts of terrorism. This programme was extended until the end of 2014 by the Terrorism Risk Insurance Program Reauthorization Act 2007 (TRIPRA).
Kidnap and ransom insurance is designed to protect individuals and companies operating in high-risk regions worldwide against the risks of kidnapping, extortion, wrongful detention, and hijacking.
Political risk insurance can be purchased by businesses with operations in countries where political instability, revolution, or other political events may result in a financial loss.

Life Insurance

Life insurance provides a monetary benefit to the family or other designated beneficiaries of a deceased person, and may specifically cover income for the insured person’s family, burial, funeral, and other final expenses. Life insurance policies often allow the proceeds to be paid either as a lump-sum cash payment or as an annuity. In most jurisdictions, a person cannot take out a policy on another individual without their knowledge and consent.

Annuities provide a stream of payments and are generally classified as insurance because they are issued by insurance companies, regulated as insurance, and require the same actuarial and investment management expertise as life insurance. Annuities and pensions that provide lifetime payments are sometimes regarded as insurance against the possibility that a retiree will outlive their financial resources. In this sense, they complement life insurance and, from an underwriting perspective, are the mirror image of it.

Certain life insurance contracts accumulate a cash value, which may be accessed by the insured if the policy is surrendered, or which may be borrowed against. Some policies, such as annuities and endowment policies, are financial instruments intended to accumulate or liquidate wealth as needed.

In many countries, including the United States and the UK, tax law permits the interest on this cash value to be tax-deferred under certain circumstances. This has led to widespread use of life insurance as a tax-efficient method of saving as well as providing protection against early death. In the United States, interest income on life insurance policies and annuities is generally tax-deferred. However, in some cases, the benefits of tax deferral may be offset by a lower return, depending on the insurance company, the type of policy, and other variables such as mortality rates and market returns. Moreover, other tax-advantaged savings vehicles, such as IRAs, 401(k) plans, and Roth IRAs, may offer better alternatives for value accumulation.

Burial Insurance

Burial insurance is an early form of life insurance, paid out upon death to cover final expenses such as funeral costs. The Greeks and Romans introduced burial insurance around 600 CE through guilds known as benevolent societies, which cared for surviving families and covered members’ funeral expenses. Guilds in the Middle Ages served a similar function, as did friendly societies during Victorian times.

Property Insurance

Property insurance provides protection against risks to property, such as fire, theft, or weather-related damage. This category includes specialised forms of insurance such as fire insurance, flood insurance, earthquake insurance, home insurance, inland marine insurance, and boiler insurance. The term “property insurance” may, like casualty insurance, be used as a broad category encompassing various subtypes of insurance, some of which are listed below:

Aviation insurance protects aircraft hulls and spare parts, as well as associated liability risks, including passenger and third-party liability. Airports may also be covered under this category, encompassing air traffic control and refuelling operations for international airports as well as smaller domestic exposures.
Boiler insurance (also known as boiler and machinery insurance, or equipment breakdown insurance) covers accidental physical damage to boilers, equipment, or machinery.
Builder’s risk insurance protects against physical loss or damage to property during construction. It is typically written on an “all risks” basis, covering damage arising from any cause not expressly excluded, including the negligence of the insured. This type of insurance safeguards a person’s or organisation’s insurable interest in materials, fixtures, or equipment used in the construction or renovation of a building or structure, should those items sustain physical loss or damage from an insured peril.
Crop insurance may be purchased by farmers to manage risks associated with crop production, including loss or damage caused by weather, hail, drought, frost, pests (particularly insects), or disease—some of which are termed “named perils.” Index-based insurance models use climate data to define specific triggers that, if exceeded, have a high probability of causing substantial crop loss. Compensation is payable when harvest losses occur in association with exceeding these climate thresholds.
Earthquake insurance provides coverage in the event of property damage caused by an earthquake. Most standard home insurance policies do not include earthquake damage. Policies generally feature high deductibles, with premiums determined by location and construction type, reflecting the likelihood of an earthquake and potential severity.
Fidelity bonds are a form of casualty insurance covering losses arising from fraudulent acts by specified individuals, typically employees.
Flood insurance protects against property loss caused by flooding. In regions where private insurers do not provide coverage, government schemes such as the U.S. National Flood Insurance Program serve as insurers of last resort.
Home insurance (also called hazard insurance or homeowners’ insurance, often abbreviated HOI) covers damage or destruction of the policyholder’s home. Certain risks, such as flood or earthquake, may require additional coverage. Maintenance-related issues are generally the homeowner’s responsibility. Policies may also include coverage for household contents or these may be purchased separately, especially for tenants. In some countries, home insurance packages include liability coverage for injuries or property damage caused by household members, including pets.
Landlord insurance covers residential or commercial property rented to tenants and the landlord’s liability for occupants. Standard homeowners’ insurance typically covers only owner-occupied properties and does not extend to tenant-related liability or damage.
Marine insurance and marine cargo insurance cover loss or damage to vessels at sea or on inland waterways, as well as cargo in transit, irrespective of the transport method. When cargo ownership and the carrier are separate entities, insurance typically compensates the cargo owner for losses from events such as fire or shipwreck, excluding losses recoverable from the carrier or its insurance. Many marine policies also include “time element” coverage, compensating for loss of profit or additional business expenses caused by delays from a covered loss.
Renters’ insurance (or tenants’ insurance) provides some benefits of homeowners’ insurance but generally excludes coverage for the dwelling itself, except for minor alterations made by the tenant.
Supplemental natural disaster insurance covers specific expenses when a natural disaster renders a home uninhabitable, with periodic payments made until the home is restored or a specified time period elapses.
Surety bonds involve three-party agreements guaranteeing the performance of a principal.
Volcano insurance provides protection against damage specifically caused by volcanic eruptions.
Windstorm insurance covers damage caused by wind events, such as hurricanes.

Liability Insurance

Liability insurance is a broad category covering legal claims made against the insured. Many types of insurance include some aspect of liability coverage. For instance, a homeowner’s insurance policy typically provides liability coverage, protecting the insured if someone slips and falls on their property. Similarly, automobile insurance includes liability coverage to indemnify the insured against harm a vehicle accident may cause to others’ lives, health, or property. Liability insurance generally offers two main protections: legal defence in the event of a lawsuit and indemnification (payment on behalf of the insured) in respect of settlements or court judgments. Liability policies usually cover only negligent acts and will not apply to wilful or intentional acts.

Public liability insurance or general liability insurance protects a business or organisation against claims arising from injury to members of the public or damage to their property caused by the organisation’s operations.
Directors and officers (D&O) liability insurance protects a company, usually a corporation, against costs resulting from litigation due to errors made by directors or officers for which they are legally liable.
Environmental liability insurance or environmental impairment insurance covers the insured for bodily injury, property damage, and cleanup costs resulting from the dispersal, release, or escape of pollutants.
Errors and omissions (E&O) insurance provides liability coverage for professionals, such as insurance agents, real estate agents, architects, third-party administrators (TPAs), and other business professionals.
Prize indemnity insurance protects the insured against losses arising from offering a substantial prize at a specific event—for example, a hole-in-one prize at a golf tournament or a half-court basketball shot prize.
Professional liability insurance, also called professional indemnity (PI) insurance, protects professionals such as architects, doctors, or corporate consultants against potential negligence claims from clients or patients. Professional liability insurance may have profession-specific names; for example, in the medical field, it is often called medical malpractice insurance.

A commercial insured’s liability programme often comprises multiple layers. The first layer, primary insurance, provides first-dollar indemnity for judgments and settlements up to the policy’s liability limits. Primary insurance usually carries a deductible and obliges the insurer to defend the insured against lawsuits, typically by appointing legal counsel.

Commercial entities may also opt to self-insure. Above the primary insurance or self-insured retention, the insured may purchase one or more layers of excess insurance, providing additional indemnity coverage. Types of excess insurance include:

Stand-alone excess policies, which contain their own terms, conditions, and exclusions;
Follow form excess insurance, which mirrors the terms of the underlying policy except where explicitly stated otherwise;
Umbrella insurance policies, which in some cases may provide broader coverage than the underlying insurance.

Credit Insurance

Credit insurance repays part or all of a loan if the borrower becomes insolvent.

Mortgage insurance protects the lender against borrower default. While technically a form of credit insurance, the term “credit insurance” more commonly refers to policies covering other types of debt.
Many credit cards offer payment protection plans, which constitute a form of credit insurance.
Trade credit insurance covers the accounts receivable of a business, reimbursing the policyholder if a debtor defaults on payment.
Collateral protection insurance (CPI) covers property, primarily vehicles, held as security for loans provided by lending institutions.

Cyber-Attack Insurance

Cyber-insurance is a commercial lines insurance product designed to provide coverage for corporations against Internet-based risks, and more broadly, against risks related to information technology infrastructure, data privacy, information governance liability, and associated activities.

Other Types of Insurance

All-risk insurance covers a wide range of incidents and perils, except those explicitly excluded in the policy. This differs from peril-specific insurance, which only covers losses arising from the perils listed. For example, in motor insurance, an all-risk policy may also cover damage caused by the policyholder themselves.
Bloodstock insurance protects individual horses or groups of horses under common ownership. Coverage typically includes mortality due to accident, illness, or disease, but may also extend to infertility, transit loss, veterinary fees, and prospective foals.
Business interruption insurance covers loss of income and additional expenses incurred when normal business operations are interrupted by a covered peril.
Defence Base Act (DBA) insurance provides coverage for civilian workers employed by the government to fulfil contracts outside the United States and Canada. DBA is required for U.S. citizens, residents, Green Card holders, and employees or subcontractors on overseas government contracts. Coverage usually includes medical treatment costs, wage loss, and disability or death benefits.
Expatriate insurance offers individuals and organisations operating abroad protection for automobiles, property, health, liability, and business activities.
Hired-in plant insurance covers liability arising when a customer, under a hire contract, is responsible for the cost of hired-in equipment and any rental charges due to the plant hire company, including construction plant and machinery.
Legal expenses insurance covers policyholders for potential costs associated with legal action against an individual or organisation. There are two main types: before the event insurance and after the event insurance.
Livestock insurance is a specialist policy for commercial or hobby farms, aquariums, fish farms, or other animal holdings. Cover includes mortality or economic slaughter due to accident, illness, or disease, and may extend to destruction by government order.
Media liability insurance protects professionals in film, television, and print against risks such as defamation.
Nuclear incident insurance covers damages arising from incidents involving radioactive materials and is generally administered at the national level (see the nuclear exclusion clause; in the United States, refer to the Price–Anderson Nuclear Industries Indemnity Act).
Over-redemption insurance is purchased by businesses to protect against financial loss if a promotion proves more successful than anticipated or budgeted.
Pet insurance covers pets against accidents and illnesses; some policies also include routine wellness care and burial expenses.
Pollution insurance typically provides first-party coverage for contamination of insured property, whether from on-site or external sources. It also covers third-party liability arising from accidental contamination of air, water, or land. Coverage often includes cleanup costs and may extend to releases from underground storage tanks. Intentional acts are excluded.
Purchase insurance provides protection for purchased products, including individual purchase protection, warranties, guarantees, care plans, and mobile phone insurance. Coverage is usually limited to specific issues identified in the policy.
Tax insurance is increasingly used in corporate transactions to protect taxpayers if a tax position is challenged by a tax authority, such as the IRS or other state, local, or foreign authorities.
Title insurance guarantees that the title to real property is vested in the purchaser or mortgagee free from liens or encumbrances. It is usually issued in conjunction with a public records search at the time of a property transaction.
Travel insurance provides coverage for those travelling abroad, including medical expenses, loss of personal belongings, travel delays, and personal liability.
Tuition insurance protects students against financial loss resulting from involuntary withdrawal from cost-intensive educational institutions.
Interest rate insurance protects the holder from adverse changes in interest rates, for example on variable-rate loans or mortgages.
Divorce insurance is a form of contractual liability insurance that pays a cash benefit if the insured’s marriage ends in divorce.

Insurance Financing Vehicles

Fraternal insurance is provided cooperatively by fraternal benefit societies or other social organisations.
No-fault insurance is a type of policy, typically in the context of motor insurance, whereby insureds are indemnified by their own insurer regardless of who is at fault in an incident.
Protected self-insurance is an alternative risk-financing mechanism in which an organisation retains the mathematically calculated cost of risk internally while transferring catastrophic risk, subject to specific and aggregate limits, to an insurer. This ensures that the maximum total cost of the programme is known. A properly designed and underwritten Protected Self-Insurance Programme reduces and stabilises insurance costs while providing valuable risk-management information.
Retrospectively rated insurance is a method of establishing premiums for large commercial accounts. The final premium is based on the insured’s actual loss experience during the policy term, sometimes subject to minimum and maximum limits, with the final premium determined by a formula. Under this scheme, the current year’s premium is partially or wholly based on that year’s losses, although premium adjustments may take months or even years beyond the policy’s expiry. The rating formula is guaranteed in the insurance contract. Formula:
Retrospective premium = converted loss + basic premium × tax multiplier.
Numerous variations of this formula exist and are in use.
Formal self-insurance (active risk retention) is the deliberate decision to pay for otherwise insurable losses out of one’s own funds. This may be done formally by establishing a dedicated fund into which contributions are made periodically, or informally by foregoing the purchase of conventional insurance and paying out-of-pocket. Self-insurance is usually employed to cover high-frequency, low-severity losses. Such losses, if insured conventionally, would incur premiums that include loadings for administrative expenses, policy acquisition, premium taxes, and contingencies. For small, frequent losses, these transaction costs may exceed the benefit of volatility reduction offered by insurance.
Reinsurance is a form of insurance purchased by insurance companies or self-insured employers to protect against unexpected losses. Financial reinsurance is a subset of reinsurance used primarily for capital management rather than risk transfer.
Social insurance comprises a set of insurance coverages—including elements of life insurance, disability income insurance, unemployment insurance, health insurance, and others—often consolidated within a social security system. Participation is generally mandatory for all citizens or residents. By requiring everyone to become policyholders and pay premiums, it provides a social safety net, ensuring that all can claim benefits when necessary. Examples include National Insurance in the United Kingdom and Social Security in the United States.
Stop-loss insurance provides protection against catastrophic or unpredictable losses. It is purchased by organisations wishing to avoid assuming 100% of the liability arising from their plans. Under a stop-loss policy, the insurer assumes responsibility for losses exceeding specified limits, known as deductibles.

Closed Community and Governmental Self-Insurance

Certain communities prefer to create a form of mutual insurance among themselves without using contractual risk transfer, which assigns explicit numerical values to risk. Several religious groups, including the Amish and some Muslim communities, rely on support provided by their members when disasters occur. In such arrangements, the risk presented by any individual is collectively assumed by the community, which bears the cost of rebuilding lost property and supporting those whose needs suddenly increase following a loss. In cohesive communities where members can be trusted to follow community leaders, this informal form of insurance can function effectively. It allows the community to mitigate the extreme differences in insurability among its members. This approach is sometimes further justified by the concept of moral hazard associated with formal insurance contracts.

In the United Kingdom, The Crown (which, for practical purposes, refers to the civil service) historically did not insure government property, such as public buildings. If a government building was damaged, repair costs were met from public funds, as this was, in the long term, more economical than paying insurance premiums. Since many UK government buildings have now been sold to property companies and leased back, this practice has become less common.

In the United States, the most widespread form of self-insurance is governmental risk management pools. These are self-funded cooperatives that provide coverage for the majority of governmental entities, including county councils, municipalities, and school districts. Rather than each entity self-insuring independently and risking bankruptcy from a large judgment or catastrophic loss, such entities participate in a pooled system. These pools are capitalised through member contributions or bond issuance and provide coverage—such as general liability, motor vehicle liability, professional liability, workers’ compensation, and property—to their members in a manner similar to private insurance companies.

Self-insured pools offer several advantages, including lower costs (by eliminating the need for insurance brokers), enhanced benefits such as loss-prevention services, and specialised expertise. Of approximately 91,000 distinct governmental entities in the United States, around 75,000 participate in self-insured pools across various lines of coverage, forming roughly 500 pools. Although this represents a relatively small segment of the insurance market, annual contributions (self-insured premiums) to such pools have been estimated at up to $17 billion.

Insurance Companies

Insurance companies may provide any combination of insurance types but are often classified into three principal groups:

Life insurance companies, which provide life insurance, annuities, and pension products, and bear similarities to asset management businesses.
Non-life or property/casualty insurance companies, which provide other types of insurance.
Health insurance companies, which sometimes also offer life insurance or employee benefits.

General insurance companies can be further subdivided into the following categories:

Standard lines
Excess lines

In most countries, life and non-life insurers are subject to distinct regulatory regimes, as well as differing tax and accounting rules. The primary reason for this distinction is that life, annuity, and pension business is inherently long-term—coverage for life assurance or a pension may extend over many decades. By contrast, non-life insurance typically covers a shorter period, often just one year.

Mutual versus Proprietary

Insurance companies are commonly classified as either mutual or proprietary. Mutual companies are owned by the policyholders, whereas proprietary insurance companies are owned by shareholders, who may or may not hold policies themselves.

Demutualisation of mutual insurers to form stock companies, as well as the creation of a hybrid known as a mutual holding company, became common in some countries, such as the United States, in the late twentieth century. However, not all jurisdictions permit mutual holding companies.

Reinsurance Companies

Reinsurance companies provide insurance policies to other insurance companies, enabling them to reduce risk and protect against substantial losses. The reinsurance market is dominated by a small number of large companies with considerable reserves. A reinsurer may also write direct insurance risks.

Captive Insurance Companies

Captive insurance companies are limited-purpose insurers established specifically to finance risks originating from their parent group or groups. This definition may sometimes extend to include certain risks of the parent company’s clients. In essence, a captive functions as an in-house self-insurance vehicle.

Captives may take several forms:

Pure captives, wholly owned subsidiaries of the self-insured parent company.
Mutual captives, which insure the collective risks of members of a specific industry.
Association captives, which self-insure individual risks of members of a professional, commercial, or industrial association.

Captives offer commercial, economic, and tax advantages to their sponsors by reducing costs, facilitating insurance risk management, and providing flexible cash flows. Additionally, they can provide coverage for risks not readily available or affordably priced in the traditional insurance market.

Risks underwritten by captives for their parents may include property damage, public and product liability, professional indemnity, employee benefits, employers’ liability, motor coverage, and medical aid expenses. Exposure to these risks can be mitigated through reinsurance.

The growing importance of captives in risk management stems from:

Increasing premiums across nearly all lines of coverage
Difficulty in obtaining insurance for certain fortuitous risks
Variations in coverage standards globally
Rating structures that reflect market trends rather than individual loss experience
Insufficient credit for deductibles or loss-control measures

Other Forms

Other possible structures for insurance companies include reciprocals, in which policyholders share risks, and Lloyd’s organisations.

Admitted versus Non-Admitted

In the United States, admitted insurance companies are those licensed by the state insurance agency; the insurance they provide is referred to as admitted insurance. Non-admitted companies are not state-approved but may provide insurance under special circumstances when admitted insurers cannot or will not meet the demand.

Insurance Consultants

Some companies operate as insurance consultants, similar to mortgage brokers, being paid a fee by clients to identify the most suitable insurance policy across multiple insurers. Similarly, insurance brokers also seek the best policies but are usually compensated by commission from the selected insurer rather than directly from the client.

Neither insurance consultants nor brokers are insurance companies, and no risks are transferred to them. Third-party administrators (TPAs) perform underwriting and sometimes claims-handling services for insurers, offering specialised expertise not always available in-house.

Financial Stability and Rating

The financial stability of an insurance company is a crucial consideration when purchasing a policy, as premiums paid now provide coverage for potential losses many years in the future. A financially robust insurer reduces the risk of insolvency, which could leave policyholders with limited coverage or reliance on government-backed insurance schemes with lower payouts.

Independent rating agencies provide evaluations of insurance companies’ financial viability. Companies are rated by agencies such as AM Best, which assess financial strength (the ability to pay claims) and also evaluate financial instruments issued by the insurer, including bonds, notes, and securitisation products.

Across the World

Advanced economies account for the majority of the global insurance industry. According to Swiss Re, the global insurance market wrote $7.186 trillion in direct premiums in 2023. (“Direct premiums” refers to premiums written directly by insurers before accounting for the ceding of risk to reinsurers.) The United States had the largest insurance market, with $3.226 trillion (44.9%) of direct premiums written. The People’s Republic of China ranked second with $723 billion (10.1%), the United Kingdom third with $374 billion (5.2%), and Japan fourth with $362 billion (5.0%). However, the European Union’s single market represents the true second-largest market, with a 16% market share.

Regulatory Differences

In the United States, insurance is regulated at the state level under the McCarran–Ferguson Act, though there are periodic proposals for federal intervention. A nonprofit coalition of state insurance agencies, the National Association of Insurance Commissioners (NAIC), works to harmonise the country’s various laws and regulations. The National Conference of Insurance Legislators (NCOIL) also seeks to unify differing state laws. California Proposition 103 (1988) is credited with reducing home insurance rates but has been criticised for limiting availability of home insurance in wildfire-prone areas.

In the European Union, the Third Non-Life Directive and the Third Life Directive, both enacted in 1992 and effective from 1994, established a single insurance market. These directives permit insurance companies to operate anywhere within the EU (subject to approval by the authority in their head office) and allow consumers to purchase insurance from any insurer within the EU. In the United Kingdom, insurance regulation was taken over by the Financial Services Authority in 2005, replacing the General Insurance Standards Council. Key legislative measures include the Insurance Companies Act 1973 and a subsequent Act of 1982, with reforms to warranties and other aspects still under discussion as of 2012.

The insurance industry in China was nationalised in 1949 and initially provided by a single state-owned company, the People’s Insurance Company of China, which later suspended operations as demand fell under the communist system. Market reforms from 1978 gradually expanded the market, culminating in the Insurance Law of the People’s Republic of China (1995). This was followed by the creation of the China Insurance Regulatory Commission (CIRC) in 1998, which possesses broad regulatory authority over China’s insurance market.

In India, the Insurance Regulatory and Development Authority (IRDA), established under Section 4 of the IRDA Act 1999, serves as the country’s insurance regulator. The National Insurance Academy, Pune, functions as the premier institution for insurance capacity-building, promoted with support from the Ministry of Finance and both Life & General Insurance companies, including LIC.

In Russia, in 2017, a collaborative project between the Bank of Russia and Yandex introduced a special verification mark in Yandex search results—a green circle with a tick and the text “Реестр ЦБ РФ” (Unified State Register of Insurance Entities). This mark informs consumers that the website offers financial services provided by a verified insurance company, broker, or mutual insurance association.

Insurance Practices and Controversies

Does Not Reduce the Risk

Insurance functions primarily as a risk transfer mechanism, whereby the financial burden arising from a fortuitous event is shifted to a larger entity, typically an insurance company, in exchange for the payment of premiums. It is important to note that insurance reduces only the financial consequences of an event, not the likelihood of its occurrence.

Both the insurer and the insured are exposed to risk. When underwriting a policy, the insurance company assesses the risk involved, which can affect the premium charged. If the insurer determines that the policyholder presents a higher likelihood of making a claim, premiums may increase. Conversely, premiums may be reduced if the policyholder adheres to a risk management programme recommended by the insurer. It is therefore vital that insurers treat risk management as a collaborative effort with policyholders, as an effective risk management strategy both minimises the probability of a large claim for the insurer and helps stabilise or lower premiums for the policyholder.

Research conducted by the University of Tennessee (2014) indicated that, although staff within businesses recognised the importance of insurance, they were generally too removed from insurance provision or costs to fully understand their organisation’s insurance requirements.

For financially stable individuals who plan thoroughly for unexpected life events, insurance may be optional. However, such individuals must possess sufficient resources to cover a total loss of employment or possessions. Certain states may accept alternatives such as a surety bond, a government bond, or even a cash deposit with the state.

Moral Hazard

Insurers may encounter a phenomenon known as moral hazard, whereby insured individuals are less cautious about risks than they would be otherwise, given that the financial consequences are borne by the insurer. This can ‘insulate’ policyholders from the true costs of living with risk, potentially negating behaviours that might otherwise mitigate or adapt to risk. Some critics argue that insurance schemes, if not properly designed, may therefore be maladaptive.

Complexity of Insurance Policy Contracts

Insurance policies can be highly complex, and some policyholders may not fully comprehend all the fees and coverages included. Consequently, individuals may purchase policies on unfavourable terms. To address these issues, many countries have established detailed statutory and regulatory frameworks governing every aspect of the insurance business, including minimum standards for policies and the manner in which they may be advertised and sold.

For instance, the majority of insurance policies in English today are drafted in plain English, as the industry learned that courts will often refuse to enforce policies against insureds when judges themselves cannot decipher the language. Typically, courts interpret ambiguities in favour of the insured, construing them against the insurance company.

Many institutional purchasers of insurance acquire coverage through an insurance broker. While brokers ostensibly represent the buyer and advise on appropriate coverage and policy limitations, most brokers receive commission payments based on a percentage of the insurance premium. This creates a conflict of interest, as brokers may have a financial incentive to encourage the purchase of more insurance than is strictly necessary, or at a higher premium. Nevertheless, brokers generally maintain contracts with multiple insurers, allowing them to “shop” the market for the best rates and coverage options.

Insurance may also be obtained via an agent. A tied agent, who works exclusively with a single insurer, represents the insurance company from which the policyholder purchases the policy. A free agent, by contrast, may sell policies from multiple insurers. Agents face a different potential conflict of interest: because they work directly for the insurer, they may advise clients in ways that favour the insurance company, particularly in the event of a claim. Agents usually cannot offer the same breadth of choice as a broker.

An independent insurance consultant provides advice on a fee-for-service basis, similar to a solicitor, and therefore offers fully independent guidance, free from the financial conflicts of interest inherent to brokers or agents. However, even independent consultants must typically work through brokers or agents to secure coverage for their clients.

Limited Consumer Benefits

In the United States, economists and consumer advocates generally consider insurance most valuable for low-probability, catastrophic losses, but not for high-probability, minor losses. Consumers are thus advised to select high deductibles and avoid insuring losses that would not materially disrupt their lives. Despite this, many consumers prefer low deductibles and tend to insure relatively frequent, minor losses, possibly due to a lack of understanding or underestimation of low-probability risks. This behaviour may reduce the purchase of insurance for low-probability events and can lead to inefficiencies arising from moral hazard.

Redlining

Redlining is the practice of denying insurance coverage in specific geographic areas, ostensibly because of a high likelihood of loss, though the underlying motivation is often unlawful discrimination. Racial profiling and redlining have a long history in the property insurance industry in the United States. Analyses of industry underwriting and marketing materials, court documents, and research conducted by government agencies, community organisations, and academics indicate that race has historically influenced, and continues to influence, insurance policies and practices.

In July 2007, the US Federal Trade Commission (FTC) published a report on credit-based insurance scores in automobile insurance. The study found that these scores were effective predictors of risk. It also revealed that African-Americans and Hispanics were disproportionately represented in the lowest credit scores and underrepresented in the highest, whereas Caucasians and Asians were more evenly distributed. The credit scores were also found to predict risk within each ethnic group, leading the FTC to conclude that the scoring models are not solely proxies for redlining. However, representatives of the Consumer Federation of America, the National Fair Housing Alliance, the National Consumer Law Center, and the Center for Economic Justice disputed the report, citing its reliance on data provided by the insurance industry.

All US states have provisions in their rate regulation laws or fair trade practice acts that prohibit unfair discrimination—commonly referred to as redlining—when setting rates or determining insurance availability.

When determining premiums and rate structures, insurers typically consider quantifiable factors, including location, credit score, gender, occupation, marital status, and education level. However, the use of such factors is sometimes regarded as unfair or unlawfully discriminatory, prompting political debate and regulatory intervention in some cases to limit the factors insurers may consider.

An insurance underwriter’s role is to evaluate the likelihood of loss associated with a given risk. Factors that increase the likelihood of loss should theoretically result in higher premiums. This principle is fundamental to insurance and essential for the solvency of insurers. Consequently, differential treatment of potential insureds—i.e., discrimination in the risk evaluation and premium-setting process—is a necessary by-product of sound insurance underwriting.

For example, older individuals are charged significantly higher premiums for term life insurance than younger individuals. This distinction reflects the increased risk: older people are more likely to die within a given period, so the risk premium must be higher to cover the greater probability of loss. Conversely, treating insureds differently without actuarially justified reasons constitutes unlawful discrimination.

Insurance Patents

In the United States, new assurance products can now be protected from copying through a business method patent. A recent example is Usage-Based Auto Insurance, initially independently invented and patented by Progressive Auto Insurance (U.S. patent 5,797,134) and by Spanish inventor Salvador Minguijon Perez.

Many independent inventors support patenting new insurance products as it provides protection from large companies when introducing their innovations to the market. Independent inventors account for approximately 70% of new U.S. patent applications in this area.

However, patenting insurance products carries risks. It is often difficult for insurers to determine whether their product infringes an existing patent. For instance, in 2004, The Hartford Insurance Company paid $80 million to independent inventor Bancorp Services to settle a patent infringement and trade secret lawsuit concerning a corporate-owned life insurance product patented by Bancorp.

Currently, around 150 new patent applications for insurance inventions are filed annually in the United States. The rate of patent grants has steadily increased from 15 in 2002 to 44 in 2006. The first U.S. insurance patent, granted in 2005, related to coverage of data transferred over the internet. Another notable application, posted in 2009, described a method to facilitate switching between insurance providers.

Insurance on Demand

Insurance on Demand (IoD) is a service providing coverage for a specific occasion or event, rather than continuous protection typical of traditional policies. For example, air travellers may purchase a policy covering a single flight instead of a longer-term travel insurance plan.

Insurance Industry and Rent-Seeking

Some critics describe certain insurance products and practices as rent-seeking, meaning they are primarily beneficial due to legal or tax advantages, rather than offering genuine protection against adverse events.

Religious Concerns

Muslim scholars have varied opinions on life insurance. Policies that earn interest or guarantee bonuses are often considered a form of riba (usury). Even policies that do not earn interest may be viewed by some as gharar (speculation), although actuarial science underpinning underwriting can mitigate this concern.

Jewish rabbinical authorities have expressed reservations regarding insurance as a potential avoidance of divine will, but most find it acceptable in moderation. Some Christian groups consider insurance a sign of insufficient faith.

Historically, Anabaptist communities—including Mennonites, Amish, Hutterites, and Brethren in Christ—resisted commercial insurance, yet many participate in community-based self-insurance schemes, which spread risk within their communities.