Insurance

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The Elements of the Decision to Purchase Insurance

Introduction:

Currently, insurance play an important role in society which include individual and organization. Insurance is a rightful transfer of the risk of loss, which from one entity to another entity. When the insurance company exchange for a premium, it can be considered a guaranteed that could prevent a large loss from a known small loss. There have been developed two important models of insurance process, firstly, collective risk theory is by far the more complicated system which instead of considering a single probability of loss that can occur is defined, and the probability of any particular number of loss is specified. Secondly, individual risk theory supply a simpler framework of analysis which consider only the pure premium or total loss distribution and by-passes the question of the shape or type of any of the three distributions (Houston:21). Actually, risk may be retained, avoided, reduced or transferred and risk management technique is the reason why insurance has been developed. Insurance is a necessary instrument for deal with the risk to a more comprehensive. In addition, the transfer of risk is not happened in the same time about transfer of property rights, so for the insured motor insurance is also important. Actually, when insurance bring some benefits, for example, indemnification, reduction of uncertainty, loss control advice, and so on. While it also includes many disadvantage, for instance, morale hazard, not all risk are insurable, etc. According to these reasons, not only individuals, but also organizations need to buy insurance which protect them profit. However, when they purchase insurance, there are so many elements to influence different individual and instrument. These factors affect people buying or not, even it also influence how much insurance they will purchase. Next part will accord five elements to analyse the influence of purchase the insurance, which include the structure of insurance market, the price of cover, availability of intermediaries, insurers' underwriting policies and insurer's security and solve.

Body:

Individual or entity could accord difference factors to make a decision which insurance they will buy and how much insurance they should buy, even which portfolio of insurance could get the highest benefits. Thus, before they purchase the insurance, they should consider around follow elements.

At the first, individual organization needs to think about the structure of insurance market. To quote C. Arthur Williams (1959:31), those with a single bureau membership of which is compulsory and deviations from whose rates are not permitted, those where bureau membership is compulsory but deviations are permitted, and those where membership is optional and deviations are permitted. In the view of the significant role played by the Fire Offices Committee the United Kingdom fire insurance market is seen to like the third category. The Fire Offices Committee members account for about 62 percent of UK direct fire premium income. Membership of the Fire Offices Committee is mostly weighted in favour of the larger companies. Unfortunately, published statistics are somewhat out of date, however, in 1970 the 38 tariff companies operating included the top three companies and accounted for about 63 percent of the market output. 37 non-tariff companies accounted for about 30 ratio of the market premium income and the residual was accounted for by Lloyd's (Doherty: 60). Beside this structure of insurance market, there is another analysis which includes four common types of insurance structure. First, non-life insurance can be thought of as a retail market where products are sold to both individual and companies. Those sold to individuals, related to as person or mass risks, include both home and auto insurance, products sold to firm which referred to as either commercial or large risks, include catastrophic damage, firm, marine, aviation, and third-party liability insurance. Secondly, reinsurance is a secondary market where insurance companies spread their risks. Further more, a reinsurance company provides cover only to insurance, not to individuals or companies. Thirdly, life insurance that sell “death only”, in other words, life insurance is a policy between owner and the insurer, which the insurer promise the insured when the occurrence of the insured individual's or individual's death, insurer will pay lots of money. Fourthly, direct insurance is selling to the public or industry. To sum up, individual or organization need basic on differently structural characteristic and insured's feature to buy insurance.

At the second, when individual or company wants to buy a type of insurance, the insurance price of cover is an important element for the purchase decision. According to different pricing policy, there are two differences kinds of methods which include participating or non-participating and independent insurance or rating organization insurance. To begin with, participating is insurance contracts which take part in the profit of the insurance, for example, life insurance. In other words, participating also called with-profits that supply a flexible condition to chase adventurous investment which could meet long-term capital growth. On the contrary, if insured is not having rights to take part in the profits of the company, it is non-profit or non-participating. Then, independent insurance is specializes in business insurance to get an idea of what coverage you will need and how much it will cost (McKeever: 114), typically it is trained and knowledgeable of the intricate insurance market. Rating organization insurance is an agent which the purpose of making regulatory filings and seeking Department of Insurance approval of police form. Actually, insurance can make such regulatory filings through a rate organization, normally, according to an absence of agreement on prices or a “tariff” agreement. As can been seen form this pricing policy, followed by different type of demand customers. Thus, for various insured should accord themselves demand to choose insurance from the price of cover.

Thirdly, intermediaries play an important role in insurance, in particular, intermediaries' main function is dominate. Actually, insurance intermediaries like exclusive agents or insurance brokers, which help to ease coordination and to further market transaction. In a general way, there are two prominent type of insurance intermediary. The first intermediary of insurance relates to the insurance intermediaries supply distribution and marketing services for insurance companies. The secondly, they provide information and advisory services for customers (Eckardt: 2). Insurance intermediaries assist in concluding an insurance contract by economizing on information and transaction costs, and they provide low cost information to insured about their fork profiles, insurance needs and suitable insurance products, reducing complexity for consumers. However, when insurance intermediaries contribute to improving transparency in insurance markets, the market for insurance intermediaries is itself characterized by imperfect information. Insured affect under incomplete and asymmetric information about the quality of the information and advisory services provided by insurance intermediaries. Thus, when the customer chooses an insurance which is availability, it is relating to themselves profits.

Fourthly, underwriting policy builds the framework within that the desk underwriter makes decisions. This policy specifies the lines of insurance that will be written as well as forbidden exposures, the amount of coverage to be permitted on various kinds of exposure, the area of the country in which each line will be written, and similar restrictions (Vaugham:119). For instance, insurances often mislead regulators and the public by denying any underwriting limitation based on the value of the home. These insurers fail to point out that they price their policies based on the value of the home. An insurer group of companies may be willing to write homes of any value, but it places homes valued over $50,000 in its preferred rate company and homes valued below $50,000 in its substandard rate company. The difference in rates based on value of the home is substantial. Therefore, the underwriting policy should be concerned because of that is very important about the customer (Squires: 165).

Finally, when customers want to buy a type of insurance, they must consider the insurances solvency. In other words, this type of ability is insurers' security and solve. In a general way, the insured measure the surplus ratio to balance the insurers' security. The surplus ratio equal to insurers' capital plus the surplus plus the reserves, then divided by liabilities. Actually, the insurers' liabilities are influenced by some factors, which are claims or loss reserves, premium reserves and other liability reserves. For other liability reserves include taxes, dividend payments and other expenses. The insured need through this statistic to know the continued solvency of a company so that, if it goes into liquidation, it will have enough surplus assets after the liabilities to policyholders have been met. And shareholders may want a more realistic assessment of assets and liabilities, on a going-concern basis (Abbott: 299).

Conclusion:

In the developing economic society, not only individual but also the company wants through the insurance to transfer the risk and get more benefits. However, when citizens or corporations demand to purchase the insurance, they must accord the feature to buy the insurance which insures' adapt to different condition. First, they need to confirm what type of insurance will buy. For this element, the insurance market provides different categories, and various compositions. Then, insured should basis on the price of cover to make a decision which type of cover price they want to accept or bear it. Next, if the insured choose availability of intermediates, it is mean the insured could get efficient information which could decrease the loss. Actually, the customer could use underwriting policy to know the insurance. Lastly, it is a very important element for the insured because it is direct influence the customers' profit. Insurers' security and solve is a guarantee which the insured's benefit could be protected. Although, there are not all elements of the decision to buy the insurance, the insured should involve these elements when they purchase the insurance. Because of that these factors affect the insured's profit.

Reference List:

Emmatt J. Vaughan (1992) Fundamentals of Risk and Insurance, 6th Edition, United Stated, John Wiley &Sons

Greene and Swadener (1974) Insurance Insights, USA, South-Western Publishing Co.

Gregory D. Squires (1997) Insurance redlining: disinvestment, reinvestment, and the evolving role of financial institutions, United Stated, The Urban Institute Press

Mike P. McKeever (2005) How to a business plan, United Stated, NOLO

Martina Eckardt (2007) Insurance Intermediation: an economic analysis of the information services market, New York, A Springer Company

Neil Doherty (1976) Insurance pricing and loss prevention, England, Saxon House, D. C. Health Ltd

Samuel L. Hayes (ed.) (1999) Financial services: perspectives and challenges, United Stated, Harvard Business School Press

Stephen Diacon (ed.) (1990) A Guide to Insurance Management, UK, The Macmillan Press Ltd

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