Editing Insurance (section)

==Insurance practices and controversies==
===Does not reduce the risk===
Insurance is just a risk transfer mechanism wherein the financial burden which may arise due to some fortuitous event is transferred to a bigger entity (i.e., an insurance company) by way of paying premiums. This only reduces the financial burden and not the actual chances of happening of an event. Insurance is a risk for both the insurance company and the insured. The insurance company understands the risk involved and will perform a [[risk assessment]] when writing the policy.  

As a result, the premiums may go up if they determine that the policyholder will file a claim. However, premiums might reduce if the policyholder commits to a risk management program as recommended by the insurer.<ref>{{Cite web|last=Libatique|first=Roxanne|title=Senior broker on the importance of reducing clients' risk exposure|url=https://www.insurancebusinessmag.com/au/features/broker-profiles/senior-broker-on-the-importance-of-reducing-clients-risk-exposure-218357.aspx|access-date=2020-11-05|website=www.insurancebusinessmag.com|language=en}}</ref> It is therefore important that insurers view risk management as a joint initiative between policyholder and insurer since a robust risk management plan minimizes the possibility of a large claim for the insurer while stabilizing or reducing premiums for the policyholder. [[University of Tennessee]] research published in 2014 found that all company staff in the businesses they surveyed recognised the importance of insurance but largely they were too distant within their organization from the provision or cost of insurance to be able to relate to company insurance needs.<ref>SpotSee, [https://cdn2.hubspot.net/hubfs/2072862/SpotSee%202017/3.2%20Resource%20Library/Assessing%20the%20Total%20Cost%20of%20Damage_HR.pdf?t=1535384103237 Assessing the Total Cost of Supply Chain Damage], ''www.spotsee.io'', revised in January 2024, accessed on 25 November 2024</ref>

If a person is financially stable and plans for life's unexpected events, they may be able to go without insurance. However, they must have enough to cover a total and complete loss of employment and of their possessions. Some states will accept a surety bond, a government bond, or even making a cash deposit with the state.{{citation needed|date=April 2017}}

===Moral hazard===
An insurance company may inadvertently find that its insureds may not be as risk-averse as they might otherwise be (since, by definition, the insured has transferred the risk to the insurer), a concept known as [[moral hazard]]. This 'insulates' many from the true costs of living with risk, negating measures that can mitigate or adapt to risk and leading some to describe insurance schemes as potentially [[Maladaptation|maladaptive]].<ref>{{Cite journal|title = Insurance as maladaptation: Resilience and the 'business as usual' paradox|journal = Environment and Planning C: Government and Policy|volume = 34|issue = 6|date = 1 September 2015|issn = 0263-774X|pages = 1175–1193|doi = 10.1177/0263774X15602022|first1 = Paul|last1 = O'Hare|first2 = Iain|last2 = White|first3 = Angela|last3 = Connelly|s2cid = 155016786|url = https://e-space.mmu.ac.uk/609056/2/OHare%20et%20al_Insurance%20as%20maladaptation.pdf}}</ref>

===Complexity of insurance policy contracts===
{{Unreferenced section|date=February 2025}}[[File:UA Flight 175 hits WTC south tower 9-11 edit.jpeg|thumb|right|[[9/11]] was a major insurance loss, but there were disputes over the [[World Trade Center (1973–2001)|World Trade Center]]'s insurance policy.]]
Insurance policies can be complex and some policyholders may not understand all the fees and coverages included in a policy. As a result, people may buy policies on unfavorable terms. In response to these issues, many countries have enacted detailed statutory and regulatory regimes governing every aspect of the insurance business, including minimum standards for policies and the ways in which they may be [[advertising|advertised]] and sold.

For example, most insurance policies in the English language today have been carefully drafted in [[plain English]]; the industry learned the hard way that many courts will not enforce policies against insureds when the judges themselves cannot understand what the policies are saying. Typically, courts construe ambiguities in insurance policies against the insurance company and in favor of coverage under the policy.

Many institutional insurance purchasers buy insurance through an insurance broker. While on the surface it appears the broker represents the buyer (not the insurance company), and typically counsels the buyer on appropriate coverage and policy limitations, in the vast majority of cases a broker's compensation comes in the form of a commission as a percentage of the insurance premium, creating a conflict of interest in that the broker's financial interest is tilted toward encouraging an insured to purchase more insurance than might be necessary at a higher price. A broker generally holds contracts with many insurers, thereby allowing the broker to "shop" the [[Market (economics)|market]] for the best rates and coverage possible.

Insurance may also be purchased through an agent. A tied agent, working exclusively with one insurer, represents the insurance company from whom the policyholder buys (while a free agent sells policies of various insurance companies). Just as there is a potential conflict of interest with a broker, an agent has a different type of conflict. Because agents work directly for the insurance company, if there is a claim the agent may advise the client to the benefit of the insurance company. Agents generally cannot offer as broad a range of selection compared to an insurance broker.

An independent insurance consultant advises insureds on a fee-for-service retainer, similar to an attorney, and thus offers completely independent advice, free of the financial conflict of interest of brokers or agents. However, such a consultant must still work through brokers or agents in order to secure coverage for their clients.

===Limited consumer benefits===
In the United States, economists and consumer advocates generally consider insurance to be worthwhile for low-probability, catastrophic losses, but not for high-probability, small losses. Because of this, consumers are advised to select high [[deductible]]s and to not insure losses which would not cause a disruption in their life. However, consumers have shown a tendency to prefer low deductibles and to prefer to insure relatively high-probability, small losses over low-probability, perhaps due to not understanding or ignoring the low-probability risk. This is associated with reduced purchasing of insurance against low-probability losses, and may result in increased inefficiencies from [[moral hazard]].<ref name=Schindler1994>Schindler, R. M. (1994). [http://www.business.camden.rutgers.edu/FacultyStaff/research/schindler/Schindler%20(1994).pdf Consumer Motivation for Purchasing Low-Deductible Insurance] {{Webarchive|url=https://web.archive.org/web/20110511084602/http://www.business.camden.rutgers.edu/FacultyStaff/research/schindler/Schindler%20(1994).pdf |date=11 May 2011 }}. In ''Marketing and Public Policy Conference Proceedings'', Vol. 4, D. J. Ringold (ed.), Chicago, IL: American Marketing Association, 147–155.</ref>

===Redlining===
{{Main|Redlining}}

[[Redlining]] is the practice of denying insurance coverage in specific geographic areas, supposedly because of a high likelihood of loss, while the alleged motivation is unlawful discrimination. [[Racial profiling]] or [[redlining]] has a long history in the property insurance industry in the United States. From a review of industry underwriting and marketing materials, court documents, and research by government agencies, industry and community groups, and academics, it is clear that race has long affected and continues to affect the policies and practices of the insurance industry.<ref>Gregory D. Squires (2003), "Racial Profiling, Insurance Style: Insurance Redlining and the Uneven Development of Metropolitan Areas", ''Journal of Urban Affairs'' Volume 25 Issue 4 pp. 391–410, November 2003</ref>

In July 2007, the US [[Federal Trade Commission]] (FTC) released a report presenting the results of a study concerning credit-based [[insurance score]]s in automobile insurance. The study found that these scores are effective predictors of risk. It also showed that African-Americans and Hispanics are substantially overrepresented in the lowest credit scores, and substantially underrepresented in the highest, while Caucasians and Asians are more evenly spread across the scores. The credit scores were also found to predict risk within each of the ethnic groups, leading the FTC to conclude that the scoring models are not solely proxies for redlining. The FTC indicated little data was available to evaluate benefit of insurance scores to consumers.<ref name="FTC Study">[http://ftc.gov/opa/2007/07/facta.shtm Credit-Based Insurance Scores: Impacts on Consumers of Automobile Insurance], Federal Trade Commission (July 2007)</ref> The report was disputed by representatives of the [[Consumer Federation of America]], the National Fair Housing Alliance, the [[National Consumer Law Center]], and the Center for Economic Justice, for relying on data provided by the insurance industry.<ref>[http://www.consumeraffairs.com/news04/2007/07/insurance_credit.html Consumers Dispute FTC Report on Insurance Credit Scoring] www.consumeraffairs.com (July 2007)</ref>

All states have provisions in their rate regulation laws or in their fair trade practice acts that prohibit unfair discrimination, often called redlining, in setting rates and making insurance available.<ref>{{cite web | author = Insurance Information Institute | author-link = Insurance Information Institute | title = Issues Update: Regulation Modernization | url = http://www.iii.org/media/hottopics/insurance/ratereg/ | access-date = 11 November 2008 }}</ref>

In determining premiums and premium rate structures, insurers consider quantifiable factors, including location, [[credit score]]s, [[gender]], [[profession|occupation]], [[marital status]], and [[education]] level. However, the use of such factors is often considered to be unfair or unlawfully [[discrimination|discriminatory]], and the reaction against this practice has in some instances led to political disputes about the ways in which insurers determine premiums and regulatory intervention to limit the factors used.

An insurance underwriter's job is to evaluate a given risk as to the likelihood that a loss will occur. Any factor that causes a greater likelihood of loss should theoretically be charged a higher rate. This basic principle of insurance must be followed if insurance companies are to remain solvent.{{Citation needed|date=February 2009}} Thus, "discrimination" against (i.e., negative differential treatment of) potential insureds in the risk evaluation and premium-setting process is a necessary by-product of the fundamentals of insurance underwriting.{{Citation needed|date=July 2019}} For instance, insurers charge older people significantly higher premiums than they charge younger people for term life insurance. Older people are thus treated differently from younger people (i.e., a distinction is made, discrimination occurs). The rationale for the differential treatment goes to the heart of the risk a life insurer takes: older people are likely to die sooner than young people, so the risk of loss (the insured's death) is greater in any given period of time and therefore the [[risk premium]] must be higher to cover the greater risk.{{Citation needed|date=July 2019}} However, treating insureds differently when there is no actuarially sound reason for doing so is unlawful discrimination.

===Insurance patents===
{{update|date=January 2018}}
{{Further|Insurance patent}}
New assurance products can now{{when|date=January 2025}} be protected from copying with a [[business method patent]] in the [[United States]].

A recent example of a new insurance product that is patented is [[Usage-based insurance|Usage Based]] [[vehicle insurance|auto insurance]]. Early versions were independently invented and patented by a major US auto insurance company, [[Progressive Corporation|Progressive Auto Insurance]] ({{US patent|5797134}}) and a Spanish independent inventor, Salvador Minguijon Perez.<ref>{{Cite patent|country=EP|number=0700009|title=Individual evaluation system for motorcar risk|inventor1-first=Salvador|inventor1-last=Minguijon Perez|pubdate=1996-03-06}}</ref>

Many independent inventors are in favor of patenting new insurance products since it gives them protection from big companies when they bring their new insurance products to market. Independent inventors account for 70% of the new U.S. patent applications in this area.{{cn|date=January 2025}}

Patenting new insurance products can be risky, as it is practically impossible for insurance companies to determine if their product will infringe on a pre-existing patent.<ref>{{Cite web |last=Solutions |first=LexisNexis Intellectual Property |date=2021-10-20 |title=Key Findings Patent Risk Survey |url=https://www.lexisnexisip.com/resources/key-findings-patent-risk-survey/ |access-date=2025-01-22 |website=LexisNexis Intellectual Property Solutions |language=en-US}}</ref> For example, in 2004, [[The Hartford]] insurance company had to pay $80 million to an independent inventor, Bancorp Services, in order to settle a patent infringement and theft of trade secret lawsuit for a type of corporate owned life insurance product invented and patented by Bancorp.<ref>{{Cite web |title=BANCORP SERVICES v. HARTFORD LIFE INSURANCE COMPANY (2004) |url=https://caselaw.findlaw.com/court/us-federal-circuit/1241840.html |access-date=2025-01-22 |website=Findlaw |language=en-US}}</ref>

There are currently about 150 new patent applications on insurance inventions filed per year in the United States. The rate at which patents have been issued has steadily risen from 15 in 2002 to 44 in 2006.<ref>{{Cite web|url=http://marketsandpatents.com/IPB-12152006.mht|archive-url=https://web.archive.org/web/20070927235655/http://www.marketsandpatents.com/IPB-12152006.mht|url-status=usurped|title=(Source: Insurance IP Bulletin, December 15, 2006)|archive-date=27 September 2007}}</ref>

The first US insurance patent was granted in 2005, which concerned coverage of data transferred over the internet.<ref>{{Cite patent|country=US|number=6922720|title=Systems and methods for insuring data over the internet|inventor1-last=Cianciarulo |inventor1-first=Krys|inventor2-last=Cardot |inventor2-first=Stephen|inventor3-last=Weiseth |inventor3-first=Thomas|assign=Portogo Inc.|pubdate=2005-07-26}}</ref> Another example of an application posted was posted in 2009.<ref> {{cite patent
| country	= US
| number	= 20090055227
| status	= patent
| title		= Risk Assessment Company
| pubdate	= 2009-02-26
| inventor1-last	= Bakos
| inventor1-first	= Thomas L.
}}</ref>{{dead|date=January 2025}} This patent application describes a method for increasing the ease of changing insurance companies.<ref>Bakos, Nowotarski, "{{usurped|1=[https://web.archive.org/web/20160409224203/http://www.marketsandpatents.com/bulletin/IPB-12152008.html An Experiment in Better Patent Examination]}}", Insurance IP Bulletin, 15 December 2008.</ref>

=== Insurance on demand ===
Insurance on demand (also IoD) is an insurance service that provides clients with coverage for a specific occasion or event when needed; i.e. only episodic rather than on a [[24/7 service|24/7]] basis as is typically provided by traditional policies. For example, air travelers can purchase a policy for one single plane flight, rather than a longer-lasting travel insurance plan.{{fact|date=September 2024}}

===Insurance industry and rent-seeking===
Certain insurance products and practices have been described as [[rent-seeking]] by critics.{{Citation needed|date=September 2008}} That is, some insurance products or practices are useful primarily because of legal benefits, such as reducing taxes, as opposed to providing protection against risks of adverse events.{{fact|date=September 2024}}

===Religious concerns===
Muslim scholars have varying opinions about life insurance. Life insurance policies that earn interest (or guaranteed bonus/NAV) are generally considered to be a form of ''[[riba]]'' ([[usury]]) and some consider even policies that do not earn interest to be a form of ''gharar'' ([[speculation]]). Some argue that ''gharar'' is not present due to the actuarial science behind the underwriting.{{cn|date=June 2024}} Jewish rabbinical scholars also have expressed reservations regarding insurance as an avoidance of God's will but most find it acceptable in moderation.<ref>{{cite web
 |url          = http://www.jabe.org/insurance.html
 |title        = Jewish Association for Business Ethics – Insurance
 |access-date   = 25 March 2008
 |archive-url  = https://web.archive.org/web/20100419131351/http://www.jabe.org/insurance.html
 |archive-date = 19 April 2010
 |url-status = dead
}}</ref>

Some Christians believe insurance represents a lack of faith.<ref>{{Cite web|last=|first=|date=|title=Insurance: A Christian Perspective - Faith in Business|url=https://www.faithinbusiness.org/Articles/590904/Insurance_A_Christian.aspx|archive-url=https://web.archive.org/web/20210301160649/https://faithinbusiness.org/Articles/590904/Insurance_A_Christian.aspx|archive-date=1 March 2021|access-date=5 January 2021|website=www.faith-in-business.org|url-status=dead}}</ref><ref>{{Cite web|url=https://www.crosswalk.com/family/finances/planning/is-your-insurance-a-lack-of-faith-in-god.html|title=Should Christians Buy Insurance?|website=Crosswalk.com|access-date=25 December 2018}}</ref> There is a long history of resistance to commercial insurance in [[Anabaptist]] communities ([[Mennonites]], [[Amish]], [[Hutterites]], [[Brethren in Christ]]), but many participate in community-based self-insurance programs that spread risk within their communities.<ref>{{cite news |url=https://www.washingtonpost.com/wp-dyn/content/article/2006/10/05/AR2006100501360.html|title=Amish Reluctantly Accept Donations |last=Rubinkam |first=Michael |newspaper=The Washington Post |date=5 October 2006 |access-date=25 March 2008}}</ref><ref>{{cite book|title = The riddle of Amish culture
|author = Donald B. Kraybill|page = 277|isbn = 978-0-8018-3682-4|year = 1989|url-access = registration|url = https://archive.org/details/riddleofamishcu000kray
|publisher = Baltimore : Johns Hopkins University Press}}</ref><ref>{{cite web| url = http://www.gameo.org/encyclopedia/contents/I583ME.htm| title = Global Anabaptist Mennonite Encyclopedia Online, Insurance| access-date = 18 January 2010}}{{Dead link|date=May 2025 |bot=InternetArchiveBot |fix-attempted=yes }}</ref>