Editing Insurance (section)

==Insurers' business model==
[[File:Accidents will happen William-H.-Watson-Universal-Star-Featurette-1922.webm|thumb|''Accidents will happen'' (William H. Watson, 1922) is a slapstick silent film about the methods and mishaps of an insurance broker. Collection [[EYE Film Institute Netherlands]].]]

Insurers may use the [[subscription business model]], collecting premium payments periodically in return for on-going and/or [[compound interest|compounding]] benefits offered to policyholders.

===Underwriting and investing===
Insurers' business model aims to collect more in premium and investment income than is paid out in losses, and to also offer a competitive price which consumers will accept. Profit can be reduced to a simple equation:
:Profit = [[cancellation (insurance)|earned premium]] + investment income – incurred loss – underwriting expenses.

Insurers make money in two ways:
* Through [[underwriting]], the process by which insurers select the risks to insure and decide how much in premiums to charge for accepting those risks, and taking the brunt of the risk should it come to fruition.
* By [[investment|investing]] the premiums they collect from insured parties

The most complicated aspect of insuring is the [[actuarial science]] of ratemaking (price-setting) of policies, which uses [[statistics]] and [[probability]] to approximate the rate of future claims based on a given risk. After producing rates, the insurer will use discretion to reject or accept risks through the underwriting process.

At the most basic level, initial rate-making involves looking at the [[frequency]] and [[wikt:severity|severity]] of insured perils and the expected average payout resulting from these perils. Thereafter an insurance company will collect historical loss-data, bring the loss data to [[present value]], and compare these prior losses to the premium collected in order to assess rate adequacy.<ref>Brown RL. (1993). [https://books.google.com/books?id=1j4O50JENE4C Introduction to Ratemaking and Loss Reserving for Property and Casualty Insurance]. ACTEX Publications.</ref> [[Loss ratio]]s and expense loads are also used. Rating for different risk characteristics involves—at the most basic level—comparing the losses with "loss relativities"—a policy with twice as many losses would, therefore, be charged twice as much. More complex [[multivariate analysis|multivariate analyses]] are sometimes used when multiple characteristics are involved and a univariate analysis could produce confounded results. Other statistical methods may be used in assessing the probability of future losses.

Upon termination of a given policy, the amount of premium collected minus the amount paid out in claims is the insurer's [[underwriting profit]] on that policy. Underwriting performance is measured by something called the "combined ratio", which is the ratio of expenses/losses to premiums.<ref>{{cite book |url= https://books.google.com/books?id=Juc4fb1Fx1cC&pg=PA614 |title= The Handbook of Municipal Bonds|first1= Sylvan G.|last1= Feldstein|first2= Frank J.|last2= Fabozzi|year= 2008|page= 614|publisher= [[John Wiley & Sons|Wiley]]|isbn= 978-0-470-10875-8|access-date= 8 February 2010}}</ref> A combined ratio of less than 100% indicates an underwriting profit, while anything over 100 indicates an underwriting loss. A company with a combined ratio over 100% may nevertheless remain profitable due to investment earnings.

Insurance companies earn [[investment]] profits on "float". Float, or available reserve, is the amount of money on hand at any given moment that an insurer has collected in insurance premiums but has not paid out in claims. Insurers start investing insurance premiums as soon as they are collected and continue to earn interest or other income on them until claims are paid out. The [[Association of British Insurers]] (grouping together 400 insurance companies and 94% of UK insurance services) has almost 20% of the investments in the [[London Stock Exchange]].<ref>[http://www.abi.org.uk/About_The_ABI/role.aspx What we do ABI] {{webarchive|url= https://web.archive.org/web/20090907134048/http://www.abi.org.uk/About_The_ABI/role.aspx |date= 7 September 2009 }}. Abi.org.uk. Retrieved on 18 July 2013.</ref> In 2007, U.S. industry profits from float totaled $58 billion. In a 2009 letter to investors, Warren Buffett wrote, "we were ''paid'' $2.8 billion to hold our float in 2008".<ref>{{Cite book|title= Delay, Deny, Defend : Why Insurance Companies Don't Pay Claims and What You Can Do About It|last= Feinman|first= Jay M.|publisher= Portfolio|year= 2010|isbn= 9781101196281|pages= 16|oclc= 883320058}}</ref>

In the [[United States]], the underwriting loss of [[property insurance|property]] and [[casualty insurance]] companies was $142.3 billion in the five years ending 2003. But overall profit for the same period was $68.4 billion, as the result of float. Some insurance-industry insiders, most notably [[Maurice R. Greenberg|Hank Greenberg]], do not believe that it is possible to sustain a profit from float forever without an underwriting profit as well, but this opinion is not universally held. Reliance on float for profit has led some industry experts to call insurance companies "investment companies that raise the money for their investments by selling insurance".<ref>{{Cite journal|last1= Weir|first1= Audrey A.|last2= Hampton|first2= John H.|date= March 1995|title= Essentials of Risk Management and Insurance|journal= The Journal of Risk and Insurance|volume= 62|issue= 1|pages= 157|doi= 10.2307/253703|issn= 0022-4367|jstor= 253703}}</ref>

Naturally, the float method is difficult to carry out in an [[Depression (economics)|economically depressed]] period. [[Bear market]]s do cause insurers to shift away from investments and to toughen up their underwriting standards, so a poor economy generally means high insurance-premiums. This tendency to swing between profitable and unprofitable periods over time is commonly known as the [[insurance cycle|underwriting, or insurance, cycle]].<ref>
Fitzpatrick, Sean, [https://ssrn.com/abstract=690316 ''Fear is the Key: A Behavioral Guide to Underwriting Cycles,''] 10 Conn. Ins. L.J. 255 (2004).
</ref>

===Claims===
[[File:Claims examiner - 1992 - BLS.png|thumb|Claims examiner at work. (1992)]]
Claims and loss handling is the materialized utility of insurance; it is the actual "product" paid for. Claims may be filed by insureds directly with the insurer or through [[Insurance broker|brokers or agents]]. The insurer may require that the claim be filed on its own proprietary forms, or may accept claims on a standard industry form, such as those produced by [[ACORD]].

Insurance company claims departments employ a large number of claims adjusters, supported by a staff of [[records management]] and [[data entry clerk]]s. Incoming claims are classified based on severity and are assigned to adjusters, whose settlement authority varies with their knowledge and experience. An adjuster undertakes an investigation of each claim, usually in close cooperation with the insured, determines if coverage is available under the terms of the insurance contract (and if so, the reasonable monetary value of the claim), and authorizes payment.

Policyholders may hire their own public adjusters to negotiate settlements with the insurance company on their behalf. For policies that are complicated, where claims may be complex, the insured may take out a separate insurance policy add-on, called loss recovery insurance, which covers the cost of a public adjuster in the case of a claim.

Adjusting liability insurance claims is particularly difficult because they involve a third party, the [[plaintiff]], who is under no contractual obligation to cooperate with the insurer and may in fact regard the insurer as a [[deep pocket]]. The adjuster must obtain legal counsel for the insured—either inside ("house") counsel or outside ("panel") counsel, monitor litigation that may take years to complete, and appear in person or over the telephone with settlement authority at a mandatory settlement conference when requested by a judge.

If a claims adjuster suspects underinsurance, the [[condition of average]] may come into play to limit the insurance company's exposure.

In managing the claims-handling function, insurers seek to balance the elements of customer satisfaction, administrative handling expenses, and claims overpayment leakages. In addition to this balancing act, [[insurance fraud|fraudulent insurance practices]] are a major [[business risks |business risk]] that insurers must manage and overcome. Disputes between insurers and insureds over the validity of claims or claims-handling practices occasionally escalate into litigation (see [[insurance bad faith]]).

===Marketing===
Insurers will often use [[agency (law)|insurance agents]] to initially market or [[Underwriting|underwrite]] their customers. Agents can be captive, meaning they write only for one company, or independent, meaning that they can issue policies from several companies. The existence and success of companies using insurance agents is likely due to the availability of improved and personalised services. Companies also use Broking firms, Banks and other corporate entities (like Self Help Groups, Microfinance Institutions, NGOs, etc.) to market their products.<ref>{{cite journal
 |first1  = Allen N.
 |last1   = Berger
 |first2  = J. David
 |last2   = Cummins
 |first3  = Mary A.
 |last3   = Weiss
 |title   = The Coexistence of Multiple Distribution Systems for Financial Services: The Case of Property-Liability Insurance.
 |journal = Journal of Business
 |volume  = 70
 |issue   = 4
 |pages   = 515–46
 |date    = October 1997
 |doi     = 10.1086/209730
 |url     = http://wrdsenet.wharton.upenn.edu/fic/wfic/papers/95/9513.pdf
|archive-url = https://web.archive.org/web/20000919231814/http://wrdsenet.wharton.upenn.edu/fic/wfic/papers/95/9513.pdf
|url-status = dead|archive-date = 19 September 2000
 |issn=0021-9398 }} ([http://fic.wharton.upenn.edu/fic/papers/95/9513.pdf online draft] {{Webarchive|url=https://web.archive.org/web/20100622075631/http://fic.wharton.upenn.edu/fic/papers/95/9513.pdf |date=22 June 2010 }})</ref>