The Fields of Insurance

1. The Fields of Insurance • 1. Private insurance • voluntary programs designed to protect individual against financial loss • 2. Social Insurance • compulsory insurance programs generally operated by government • 3. Public Benefit Guarantee Programs • quasi-social coverages usually associated with regulation

2. Private (Voluntary) Insurance • 1. Usually (but not always) voluntary. • 2. Usually (but not always) offered by private insurers.

3. History of Private Insurance - Insurance in Antiquity • 1. 3000 B.C. Chinese risk-sharing practices • 2. 500 B.C. Code of Hammurabi • 3. bottomry and respondentia contracts • 4. 2500 B.C. benevolent societies in Egypt • 5. Roman Collegia

4. History of Private Insurance -Marine and Fire Insurance • 13th Century marine insurance originates in Italy • 15th Century marine insurance to England by Lombard merchants • Year 1666 Fire of London (Dr. Nicholas Barbon) • Year 1688 Lloyd’s coffeehouse in operation • Year 1752 Ben Franklin’s Philadelphia Contributionship • Year 1792 First U.S. capital stock company, Insurance Company of North America

5. History of Private InsuranceCasualty Insurance • 1848 Accident insurance for railroad travelers • 1859 Travelers Insurance Company in U.S. sells accident insurance for travelers • 1866 Steam boiler Insurance • 1876 Fidelity bonds • 1886 Employers liability insurance • 1889 Elevators and public liability • 1898 Automobile liability insurance

6. History of Private Insurance -Life Insurance • 1536 £400 policy on William Gybbons by marine underwriters • 1693 mortality table created by Edmund Halley • 1699 Society for Assurance of Widows and Orphans charges same rate for all ages. • 1759 First U.S. life insurer, Presbyterian Ministers Fund • 1762 Equitable Society for Assurance of Life and Survivorship varied premiums with age

7. History of Private Insurance -Health Insurance • Pre-commercial insurance approaches • Greek and Roman benevolent societies • Guilds • Mutual benefit and “friendly societies” • Employees’ “establishment funds” • 1910 Montgomery Ward - first group health plan • 1930s Modern health insurance begins with Blue Cross-Blue Shield organizations

8. Monoline Organization in the U.S. • State laws restricted the lines of insurance an insurer could write, compartmentalizing underwriting power. • Three distinct classes of insurance developed: • 1. Life insurance • 2. Fire and marine insurance • 3. Casualty insurance

9. Reasons for Monoline Organization • 1. It was supposed that specialization would promote proficiency. • 2. Segregation of insurance by class would simplify financial regulation. • 3. Fear of danger in combining fire insurance (which seemed subject to catastrophes) with life insurance. • 4. New York’s Appleton Rule required insurers to follow New York law in other states.

10. Multiple-Line Transition • 1. States began to change laws in the 1940’s to permit multiple-line underwriting (writing of property and casualty by a single company). • 2. New York permitted multiple-line underwriting in 1949. • 3. Greatest benefit of multiple-line underwriting has been the “package policy.” • 4. Compartmentalization still exists between life insurers and property and casualty insurers.

11. Modern Classification of Insurance Coverages • 1. Life insurance • 2. Accident and health insurance • 3. Property and Liability insurance

12. Private (Voluntary) Insurance • 1. Life insurance • 2. Accident and health insurance • 3. Property and liability • fire • marine • casualty • fidelity and surety bonds

13. Casualty Insurance • accident and health insurance • automobile • liability • workers compensation • boiler and machinery • plate glass • burglary, robbery, theft • credit insurance • title insurance

14. Social Insurance • Based on the notion that there are some people in society who face fundamental risks that they cannot deal with themselves. • Social insurance programs rest on the premise that if an individual cannot provide for a reasonable standard of living through personal efforts, society should assist.

15. Social Insurance Definition • 1. Coverage is compulsory • 2. Eligibility derived from contributions: no requirement to demonstrate need • 3. Method of determining benefits prescribed by law • 4. Benefits not directly related to contributions

16. Social Insurance Definition • 5. Definite long-range plan for financing • 6. Cost borne primarily by contributions • 7. Plan administered or supervised by government • 8. Plan not established solely for government employees

17. History of Social Insurance • 1. Originated in Germany in 1880’s by Otto von Bismarck in an effort to outbid socialists at their own game. • 2. Other European nations followed during the period from 1911 through 1933. • 3. First social insurance program in U.S. was workers compensation in the early 1900’s. • 4. OASDI program enacted in 1935. • 5. Medicare program enacted in 1965.

18. Social Insurance Programs in the U.S. • 1. Old-Age, Survivors and Disability Insurance • 2. Railroad Retirement, Disability and Unemployment Insurance • 3. Unemployment Insurance • 4. Medicare • 5. State Compulsory Temporary Disability

19. Public Guarantee Insurance Programs • 1. Quasi social insurance programs, mainly in connection with financial institutions • 2. Public Guarantee Insurance Programs are usually allied with the function of regulation • 3. Insurance principle is used to protect lenders, depositors, or investors against loss resulting from failure of a financial institution

20. Federal Public Guarantee Programs • 1. Federal Deposit Insurance Corporation • 2. National Credit Union Administration • 3. Securities Investor Protection Corporation • 4. Pension Benefit Guarantee Corporation

21. State Public Guarantee Programs • 1. State insurer insolvency funds • 2. Unsatisfied judgment funds • Maryland • Michigan • New Jersey • New York • North Carolina

22. Similarities in Various Fields of Insurance • 1. Although details of operation may vary, the programs discussed all use some form of pooling of exposure units. • 2. The possibility of loss is transferred from the individual to the group where losses are shared on some prescribed basis. • 3. Basic concepts of pooling and sharing of losses and individual’s substitution of small, certain cost for large uncertain loss are fundamental to all the programs.