Understanding Insurance Types
Types of Insurance
There are many overlapping methods of classifying insurance. Distinctions are made according to the risks covered (personal, property, and liability), the perils covered (accident, sickness, old age, fire, windstorm, riot and civil commotion, crime, and others), the losses covered (expense reimbursement or income replacement), the property covered (such as dwellings, buildings, contents, and money) or the policy term (one year, 10 years, or the whole of life). Any analysis of these and other characteristics requires detailed consideration of specific insurance policies.
Voluntary and Compulsory Insurance
Often the distinction is made between private insurance and social insurance. In this context, social insurance is both compulsory and provided by public agencies. Perhaps a better system of broad classification would distinguish between voluntary insurance and compulsory insurance. Although many coverages classified as compulsory insurance are provided by government, government agencies also provide some insurance that is voluntarily purchased. Conversely, some compulsory insurance is provided by private insurers. Thus the distinction between compulsory insurance and voluntary insurance is independent of the purveyor of the coverage. Increasingly, compulsory insurances, regardless of purveyor, are considered to be social insurance.
Private voluntary insurance includes coverages for the personal, property, and liability risks. Personal insurance includes life, disability, and medical care coverages. Property insurance includes coverages for the cost of repair and replacement of property (direct loss) plus indemnification for the loss of use of property (indirect loss). Common perils include fire, windstorm, riot and civil commotion, and crime. Liability insurance includes coverage for personal injury (libel, slander, defamation of character), and bodily injury and property damage negligently caused by persons in their business, professional, or personal activities. Other broad categories of insurance include surety bonding and credit insurance.
Governmental voluntary insurance is confined to personal and property risks primarily. One state, Wisconsin, provides life insurance on a voluntary basis for its residents. Another state provides crop hail insurance, a property coverage. The U.S. government offers life insurance to veterans and servicemen through the Veterans Administration. Supplemental medical care insurance is available for retired people on a voluntary basis from the Social Security Administration under the Medicare program. The Federal Housing Administration insures home loans for lenders. During both World Wars, the U.S. government entered the marine insurance field. The U.S. Department of Agriculture offers crop insurance to farmers in many areas. The U.S. government assists private insurers in providing property insurance (including riot and civil disorders) for riot-affected areas and flood and water damage insurance for the lowlands along rivers and coastal areas.
There are both state and federal compulsory insurance programs. Some are funded by private insurers, others through governmental agencies. Coverage is required for personal, property, and liability risks.
Four states have compulsory, temporary, non-occupational disability insurance plans, some with state funds and others permitting private insurers.
A few states require automobile liability insurance as a condition precedent to obtaining a driver's license or registering an automobile. This insurance is funded by private insurers. Every jurisdiction has a workmen's compensation law providing for disability and medical care expense benefits for occupational injury and disease on virtually a compulsory basis as an exclusive remedy. The largest part of this insurance is provided by private insurers.
At the federal level, there are several compulsory or social insurance programs. In all instances, coverage is provided by agencies of the U. S. government or government-owned corporations. Unemployment compensation insurance is administered at the state level under federal standards and incentives. The Old-Age, Survivors, Disability, and Hospital Insurance program is administered by the Social Security Administration. The U.S. government provides insurance of bank deposits- a property insurance coverage. This insurance is required for some banks and available on a voluntary basis for others.
Individual and Group Insurance
One of the most important classifications of insurance distinguishes between individual and group insurance contracts. The characteristics of these two categories of insurance may be described by their differences.
Individual insurance comprises contracts naming as insureds individual persons or business entities with the insurance generally for the direct benefit of the persons insured. Group insurance, a major component of the employee benefit plan, is a plan in which there is coverage of a number of persons for business firms under a single contract between an insurer and the group policy-holder (such as employer or trade association). It is characterized by the group selection of insureds without evidence of insurability on an individual basis, lower costs through the economies of volume distribution and administration and the increased certainty associated with large groups of insureds, premiums influenced by the experience of the group, and the continuing contract lasting beyond the lifetime of individuals for whom protection is provided.
In the field of life and health insurance, individual insurance is further classified into ordinary and industrial insurance. Industrial life and health insurance, which is sold to low-income individuals through agents, is characterized by small policies and weekly or monthly premiums usually collected at the home of the policyholder. Generally, industrial insurance serves best those segments of the population requiring the collection and other services of the agent. The largest U.S. companies have withdrawn from the industrial field as the need for this insurance has declined: a considerable volume of industrial life insurance is written, however, particularly in the Southeast and Southwest. It represents only 4% of the total insurance in force in the United States. However, industrial insurance is a major force in the life and health insurance business of developing countries.
Group life and health insurance has grown at a substantial rate and represents 34.9% of the insurance in force in the United States. Ordinary (individual) insurance is still the most significant branch of life and health insurance, constituting 54.7% of the total life and health insurance in force.
In property and liability insurance, group insurance and other methods of mass merchandising are evolving slowly. Increasing union pressure and the desire of insurers to provide coverage to the greatest number of people at the lowest possible cost indicate that group and other methods of mass merchandising appear to be breaking out of traditional regulatory and marketing restrictions.