Insurance: Definition and Characteristics

Definition and Basic Characteristics of Insurance

• Insurance entails pooling fortuitous losses by transferring risks to insurers.
• Insurers agree to indemnify insureds for losses, provide pecuniary benefits upon occurrence, or render services related to the risk.

Characteristics of an Ideally Insurable Risk

• This refers to what makes a risk be insurable, but is not explicit in the text

Adverse Selection and Insurance

• This relates to negative impacts of insurance, but is not explicit in the text

Insurance and Gambling Compared

• Insurance handles existing pure risk, while gambling creates a new speculative risk.
• Insurance is always socially productive, whereas gambling is not.
• In insurance, both parties have a common interest in preventing a loss.
• In gambling, the winner's gain comes at the expense of the loser.

Insurance and Hedging Compared

• This relates to risks similar to insurance, but is not explicit in the text

Types of Private Insurance

• Life insurance pays death benefits to beneficiaries upon the insured's death.
• Health insurance covers medical expenses due to sickness or injury.
• Property insurance indemnifies property owners against loss or damage to real or personal property.
• Liability insurance covers the insured's legal liability arising from property damage or bodily injury to others.
• Casualty insurance covers what is not covered by fire, marine, and life insurance.
• Private insurance coverages are grouped into personal and commercial lines.
• Personal lines insure real estate and personal property of individuals and families, or provide protection against legal liability.
• Commercial lines coverages for business firms, nonprofit organizations, and government agencies.

Types of Government Insurance

• Social Insurance Programs are financed by contributions from employers and/or employees.
• Benefits are heavily weighted in favor of low-income groups.
• Eligibility and benefits are prescribed by statute.
• Examples include Social Security, Unemployment, and Workers Compensation.
• Other Government Insurance Programs are found at both the federal and state levels
• Examples include federal flood insurance and state health insurance pools.

Social Benefits of Insurance

• Indemnification for loss
• Reduction of worry and fear
• Source of investment funds
• Loss prevention
• Enhancement of credit

Social Costs of Insurance

• A cost is doing business
• The expense loading is the amount needed to pay all expenses, including commissions, general administrative expenses, state premium taxes, acquisition expenses, and an allowance for contingencies and profit.
• Fraudulent claims
• Inflated claims
• Higher premiums to cover additional losses reduce disposable income and consumption of other goods and services.