INSURANCE
A contract whereby, for specified consideration, one party undertakes to compensate the other for a loss relating to a particular subject as a result of the occurrence of designated hazards.
The normal activities of daily life carry the
risk of enormous financial loss. Many persons
are willing to pay a small amount for protection
against certain risks because that protection
provides valuable peace of mind. The term
insurance describes any measure taken for pro-
tection against risks. When insurance takes the
form of a contract in an insurance policy, it is
subject to requirements in statutes, ADMINIS-
TRATIVE AGENCY regulations, and court deci-
sions.
In an insurance contract, one party, thein-
sured, pays a specified amount of money, called
a premium, to another party, the insurer. The
insurer, in turn, agrees to compensate the
insured for specific future losses. The losses cov-
ered are listed in the contract, and the contract is
called a policy.
When an insured suffers a loss or damage
that is covered in the policy, the insured can col-
lect on the proceeds of the policy by filing a
claim, or request for coverage, with the insur-
ance company. The company then decides
whether or not to pay the claim. The recipient
of any proceeds from the policy is called the
beneficiary. The beneficiary can be the insured
person or other persons designated by the
insured.
A contract is considered to be insurance if it
distributes risk among a large number of per-
sons through an enterprise that is engaged pri-
marily in the business of insurance. Warranties
or service contracts for merchandise, for exam-
ple, do not constitute insurance. They are not
issued by insurance companies, and the risk dis-
tribution in the transaction is incidental to the
purchase of the merchandise. Warranties and
service contracts are thus exempt from strict
insurance laws and regulations.
The business of insurance is sustained by a
complex system of risk analysis. Generally, this
analysis involves anticipating the likelihood of a
particular loss and charging enough in premi-
ums to guarantee that insured losses can be
paid. Insurance companies collect the premiums
for a certain type of insurance policy and use
them to pay the few individuals who suffer losses
that are insured by that type of policy.
Most insurance is provided by private cor-
porations, but some is provided by the govern-
ment. For example, the FEDERAL DEPOSIT
INSURANCE CORPORATION (FDIC) was estab-
lished by Congress to insure bank deposits. The
federal government provides life insurance to
military service personnel. Congress and the
states jointly fund MEDICAID and MEDICARE,
which are HEALTH INSURANCE programs for
persons who are disabled or elderly. Most states
offer health insurance to qualified persons who
are indigent.
Government-issued insurance is regulated
like private insurance, but the two are very dif-
ferent.Most recipients of government insurance
do not have to pay premiums, but they also do
not receive the same level of coverage available
under private insurance policies. Government-
issued insurance is granted by the legislature,
not bargained for with a private insurance com-
pany, and it can be taken away by an act of the
legislature. However, if a legislature issues insur-
ance, it cannot refuse it to a person who qualifies
for it.
History
The first examples of insurance related to
marine activities. In many ancient societies,
merchants and traders pledged their ships or
cargo as security for loans. In Babylon creditors
charged higher interest rates to merchants and
traders in exchange for a promise to forgive the
loan if the ship was robbed by pirates or was
captured and held for ransom.
In postmedieval England, local groups of
working people banded together to create
“friendly societies,” forerunners of the modern
insurance companies. Members of the friendly
societies made regular contributions to a com-
mon fund, which was used to pay for losses suf-
fered by members. The contributions were
determined without reference to a member’s
age, and without precise identification of what
claims would be covered. Without a system to
anticipate risks and potential liability, many of
the first friendly societies were unable to pay
claims, and many eventually disbanded. Insur-
ance gradually came to be seen as a matter best
handled by a company in the business of pro-
viding insurance.
Insurance companies began to operate for
profit in England during the seventeenth cen-
tury. They devised tables to mathematically pre-
dict losses based on various data, including the
characteristics of the insured and the probability
of loss related to particular risks. These calcula-
tions made it possible for insurance companies
to anticipate the likelihood of claims, and this
made the business of insurance reliable and
profitable.
The British Parliament granted a MONOPOLY
over the business of insurance in colonial Amer-
ica to two English corporations, London Assur-
ance and Royal Exchange. During the 1760s,
colonial legislatures gave a few American insur-
ance companies permission to operate. Since the
Revolutionary War, U.S. insurance companies
have grown in number and size, with most offer-
