INSURANCE INDUSTRY

Insurance Industry

[Name of the Institute]

Insurance Industry

Introduction

The insurance industry is likely to be radically transformed under the impact of public networks, and in particular the Internet. To understand the result of the study, it is useful to bear in mind the following characteristics of the insurance industry (Eaton, 2007). The customer signs a contract with an intermediary, that is the insurance broker or agent, who spends himself in transactions with an insurance company. A recent trend, independent of the Internet, is the disintermediation known direct insurers, motivated by a strong potential for cost reduction, are self vehicle for providing insurance products directly to the customer (Glied, 2001). The direct products are cheaper. Internet is likely to reinforce this trend. One can foresee a movement of alternative forms of traditional intermediation (brokers, general agents) with new forms of intermediation-based networks.

Risk is the biggest fear for one's life. When one thinks of risk the question comes to mind that is there a market to pay someone to take the risk for us? The answer is yes; this market is insurance. Essentially, insurance is a product for consumers pay a price, the premium, to some other entity, the insurer, who then assumes the financial risks (Cummins, 1999). After the policy is purchased, if the consumer for example has a lucky year, with no loss, the income available to spend on other things or to save is $50,000 minus the premium. In an unlucky year, where the consumer becomes ill, and has $10,000 in medical bills, the insurance company pays the bills for the consumer. Disposable income remains $50,000 minus the premium for the insurance.

For explaining it in more simple words, suppose there is an entire population of people just like the hypothetical consumer, with a 10% chance of a loss of $10,000. From the insurer's perspective, if the premium they charge is $1,000, and they sell 10 policies, on average, they will collect $10,000 in premiums, and pay out one claim of $10,000, and they break even. However, this scenario ignores the administrative costs of running an insurance company (United States Government Accountability, 2011). The company incurs administrative costs in selling the policies, in paying claims, and in designing their policies. Given these costs, to make normal profits, the insurance company must charge a premium equal to the expected loss plus the administrative costs, also known as a loading factor.

Requirements of Insurance

A conventional insurance contract must have several elements, which include:

Good faith;

Insurable interest;

Proximate cause;

Indemnity;

Subrogation;

Contract execution;

Articulation of responsibility;

Insurance policy; and

Burden of proof.

Good faith refers to a mutual and honest disclosure of facts by the insured to the insurer that may affect the risk potential of insurer. Insurable interest refers to a specific thing that is in the legal title or possession of the insured; if the insurable interest is a person; there must be a legitimate financial dependency between the insured and the insured's beneficiaries. Proximate cause refers to the logical direct cause of an insurance claim event. However, indirect actions are not ...