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109-456: Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management , primarily used to protect against the risk of a contingent or uncertain loss. An entity which provides insurance is known as an insurer , insurance company , insurance carrier , or underwriter . A person or entity who buys insurance
218-662: A Nerva–Antonine dynasty -era tablet from the ruins of the Temple of Antinous in Antinoöpolis , Aegyptus . The tablet prescribed the rules and membership dues of a burial society collegium established in Lanuvium , Italia in approximately 133 AD during the reign of Hadrian (117–138) of the Roman Empire . In 1851 AD, future U.S. Supreme Court Associate Justice Joseph P. Bradley (1870–1892 AD), once employed as an actuary for
327-706: A professional role , a risk manager will "oversee the organization's comprehensive insurance and risk management program, assessing and identifying risks that could impede the reputation, safety, security, or financial success of the organization", and then develop plans to minimize and / or mitigate any negative (financial) outcomes. Risk Analysts support the technical side of the organization's risk management approach: once risk data has been compiled and evaluated, analysts share their findings with their managers, who use those insights to decide among possible solutions. See also Chief Risk Officer , internal audit , and Financial risk management § Corporate finance . Risk
436-590: A property or business to avoid legal liability is one such example. Avoiding airplane flights for fear of hijacking . Avoidance may seem like the answer to all risks, but avoiding risks also means losing out on the potential gain that accepting (retaining) the risk may have allowed. Not entering a business to avoid the risk of loss also avoids the possibility of earning profits. Increasing risk regulation in hospitals has led to avoidance of treating higher risk conditions, in favor of patients presenting with lower risk. Risk reduction or "optimization" involves reducing
545-574: A sea captain , ship-manager , or ship charterer that saved a ship from total loss was only required to pay one-half the value of the ship to the ship-owner . In the Digesta seu Pandectae (533), the second volume of the codification of laws ordered by Justinian I (527–565), a legal opinion written by the Roman jurist Paulus in 235 AD was included about the Lex Rhodia ("Rhodian law"). It articulates
654-413: A "transfer of risk." However, technically speaking, the buyer of the contract generally retains legal responsibility for the losses "transferred", meaning that insurance may be described more accurately as a post-event compensatory mechanism. For example, a personal injuries insurance policy does not transfer the risk of a car accident to the insurance company. The risk still lies with the policyholder namely
763-416: A balance between negative risk and the benefit of the operation or activity; and between risk reduction and effort applied. By effectively applying Health, Safety and Environment (HSE) management standards, organizations can achieve tolerable levels of residual risk . Modern software development methodologies reduce risk by developing and delivering software incrementally. Early methodologies suffered from
872-476: A board similarly elected. Fraternal benefit societies provide insurance benefits to their members including life insurance and endowments, annuities, disability, hospital, medical and nursing benefits, and such other benefits authorized for life insurers that are not inconsistent with the general fraternal laws. In the 21st century, fraternal benefit societies remain active in the United States. In addition to
981-453: A claim arises on the occurrence of a specified event). There are generally three types of insurance contracts that seek to indemnify an insured: From an insured's standpoint, the result is usually the same: the insurer pays the loss and claims expenses. If the Insured has a "reimbursement" policy, the insured can be required to pay for a loss and then be "reimbursed" by the insurance carrier for
1090-448: 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
1199-601: 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
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#17328513379811308-454: A company insures an individual entity, there are basic legal requirements and regulations. Several commonly cited legal principles of insurance include: To "indemnify" means to make whole again, or to be reinstated to the position that one was in, to the extent possible, prior to the happening of a specified event or peril. Accordingly, life insurance is generally not considered to be indemnity insurance, but rather "contingent" insurance (i.e.,
1417-517: A company may outsource only its software development, the manufacturing of hard goods, or customer support needs to another company, while handling the business management itself. This way, the company can concentrate more on business development without having to worry as much about the manufacturing process, managing the development team, or finding a physical location for a center. Also, implanting controls can also be an option in reducing risk. Controls that either detect causes of unwanted events prior to
1526-484: A higher probability but lower loss, versus a risk with higher loss but lower probability. Opportunity cost represents a unique challenge for risk managers. It can be difficult to determine when to put resources toward risk management and when to use those resources elsewhere. Again, ideal risk management optimises resource usage (spending, manpower etc), and also minimizes the negative effects of risks. Opportunities first appear in academic research or management books in
1635-512: A large part of the working population. With the introduction in the early twentieth century of state social welfare programs, and industrial, health and welfare regulation, the influence and membership of benefit societies have declined in importance but remain significant. Nevertheless, in many countries, for example in Europe, mutual benefit societies continue to provide statutory and supplementary healthcare coverage. Peter Kropotkin posited early in
1744-413: A minimum, the following elements: identification of participating parties (the insurer, the insured, the beneficiaries), the premium, the period of coverage, the particular loss event covered, the amount of coverage (i.e., the amount to be paid to the insured or beneficiary in the event of a loss), and exclusions (events not covered). An insured is thus said to be " indemnified " against the loss covered in
1853-498: A morally uplifting and ethical manner. Conviviality and benevolence are important principles. Fraternal societies differed from public and private hierarchical aid organizations by employing an "ethical principle of reciprocity." This removed the stigma of charity. During the eighteenth and nineteenth centuries benefit societies in the form of friendly societies and trade unions were essential in providing social assistance for sickness and unemployment, and improving social conditions for
1962-452: A more active role in loss mitigation, such as through building codes . According to the study books of The Chartered Insurance Institute, there are variant methods of insurance as follows: Insurers may use the subscription business model , collecting premium payments periodically in return for on-going and/or compounding benefits offered to policyholders. Insurers' business model aims to collect more in premium and investment income than
2071-620: A premium paid independently of loans began in Belgium about 1300 AD. Separate insurance contracts (i.e., insurance policies not bundled with loans or other kinds of contracts) were invented in Genoa in the 14th century, as were insurance pools backed by pledges of landed estates. The first known insurance contract dates from Genoa in 1347. In the next century, maritime insurance developed widely, and premiums were varied with risks. These new insurance contracts allowed insurance to be separated from investment,
2180-697: A relatively few claimants – and for overhead costs. So long as an insurer maintains adequate funds set aside for anticipated losses (called reserves), the remaining margin is an insurer's profit . Policies typically include a number of exclusions, for example: Insurers may prohibit certain activities which are considered dangerous and therefore excluded from coverage. One system for classifying activities according to whether they are authorised by insurers refers to "green light" approved activities and events, "yellow light" activities and events which require insurer consultation and/or waivers of liability, and "red light" activities and events which are prohibited and outside
2289-448: A result of the fraternal desire of men to cooperate for their mutual welfare and happiness, and that the benefit plan they introduced followed an innate prompting to protect their dependents.” The Model Fraternal Code which has been adopted in some form by most states defines fraternals as follows: Section 1. FRATERNAL BENEFIT SOCIETIES. Any incorporated society, order, or supreme lodge, without capital stock, including one exempted under
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#17328513379812398-417: A schedule for control implementation and responsible persons for those actions. There are four basic steps of risk management plan, which are threat assessment, vulnerability assessment, impact assessment and risk mitigation strategy development. According to ISO/IEC 27001 , the stage immediately after completion of the risk assessment phase consists of preparing a Risk Treatment Plan, which should document
2507-538: A separation of roles that first proved useful in marine insurance . The earliest known policy of life insurance was made in the Royal Exchange, London , on 18 June 1583, for £383, 6s. 8d. for twelve months on the life of William Gibbons. Insurance became far more sophisticated in Enlightenment-era Europe , where specialized varieties developed. Property insurance as we know it today can be traced to
2616-639: A shared ethnic background, religion, occupation, geographical region, or other basis. Benefits may include financial security or assistance for education, unemployment, birth of a baby, sickness and medical expenses, retirement, and funerals. Often benefit societies provide a social or educational framework for members and their families to support each other and contribute to the wider community. Examples of benefit societies include trade unions , burial societies , friendly societies , cooperatives , credit unions , self-help groups , landsmanshaftn , immigrant hometown societies , fraternal organizations built upon
2725-399: A staff of records management and data entry clerks . 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,
2834-622: A tradition of welfare programs in Prussia and Saxony that began as early as in the 1840s. In the 1880s Chancellor Otto von Bismarck introduced old age pensions, accident insurance and medical care that formed the basis for Germany's welfare state . In Britain more extensive legislation was introduced by the Liberal government in the National Insurance Act 1911 . This gave the British working classes
2943-571: 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. A combined ratio of less than 100% indicates an underwriting profit, while anything over 100 indicates an underwriting loss. A company with
3052-477: Is ISO Guide 31073:2022 , "Risk management — Vocabulary". Ideally in risk management, a prioritization process is followed. Whereby the risks with the greatest loss (or impact) and the greatest probability of occurring are handled first. Risks with lower probability of occurrence and lower loss are handled in descending order. In practice the process of assessing overall risk can be tricky, and organisation has to balance resources used to mitigate between risks with
3161-807: Is a voluntary association formed to provide mutual aid , benefit, for instance insurance for relief from sundry difficulties. Such organizations may be formally organized with charters and established customs or may arise ad hoc to meet the unique needs of a particular time and place. Many major financial institutions existing today, particularly some insurance companies, mutual savings banks , and credit unions , trace their origins back to benefit societies, as can many modern fraternal organizations and fraternal orders which are now viewed as being primarily social. The modern legal system essentially requires all such organizations of appreciable size to incorporate one of these forms or another to continue to exist on an ongoing basis. Benefit societies may be organized around
3270-427: Is a viable strategy for small risks where the cost of insuring against the risk would be greater over time than the total losses sustained. All risks that are not avoided or transferred are retained by default. This includes risks that are so large or catastrophic that either they cannot be insured against or the premiums would be infeasible. War is an example since most property and risks are not insured against war, so
3379-465: Is at the same time of a beneficial and fraternal character because they aim to improve the condition of a class of persons who are engaged in a common pursuit and to unite them by a stronger bond of sympathy and interest. As indicated in this case, a fraternal benefit society is required to have a "common bond" among its members. Further, a society is required to specify in its laws the eligibility standards for membership, as well as classes of membership,
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3488-427: Is considered to be the leading judicial pronouncement of what constitutes a fraternal society. A fraternal-beneficial society would be one whose members have adopted the same, or a very similar calling, avocation, or profession, or who are working in unison to accomplish some worthy object, and who for that reason have banded themselves together as an association or society to aid and assist one another, and to promote
3597-511: Is defined as the possibility that an event will occur that adversely affects the achievement of an objective. Uncertainty, therefore, is a key aspect of risk. Risk management appears in scientific and management literature since the 1920s. It became a formal science in the 1950s, when articles and books with "risk management" in the title also appear in library searches. Most of research was initially related to finance and insurance. One popular standard clarifying vocabulary used in risk management
3706-451: Is determining the rate of occurrence since statistical information is not available on all kinds of past incidents and is particularly scanty in the case of catastrophic events, simply because of their infrequency. Furthermore, evaluating the severity of the consequences (impact) is often quite difficult for intangible assets. Asset valuation is another question that needs to be addressed. Thus, best educated opinions and available statistics are
3815-494: Is known as a policyholder , while a person or entity covered under the policy is called an insured . The insurance transaction involves the policyholder assuming a guaranteed, known, and relatively small loss in the form of a payment to the insurer (a premium) in exchange for the insurer's promise to compensate the insured in the event of a covered loss. The loss may or may not be financial, but it must be reducible to financial terms. Furthermore, it usually involves something in which
3924-531: Is known, the events that a source may trigger or the events that can lead to a problem can be investigated. For example: stakeholders withdrawing during a project may endanger funding of the project; confidential information may be stolen by employees even within a closed network; lightning striking an aircraft during takeoff may make all people on board immediate casualties. The chosen method of identifying risks may depend on culture, industry practice and compliance. The identification methods are formed by templates or
4033-414: Is often used in place of risk-sharing in the mistaken belief that you can transfer a risk to a third party through insurance or outsourcing. In practice, if the insurance company or contractor go bankrupt or end up in court, the original risk is likely to still revert to the first party. As such, in the terminology of practitioners and scholars alike, the purchase of an insurance contract is often described as
4142-409: Is paid out in losses, and to also offer a competitive price which consumers will accept. Profit can be reduced to a simple equation: Insurers make money in two ways: 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,
4251-426: 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 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
4360-483: Is therefore difficult or impossible to predict. A common error in risk assessment and management is to underestimate the wildness of risk, assuming risk to be mild when in fact it is wild, which must be avoided if risk assessment and management are to be valid and reliable, according to Mandelbrot. According to the standard ISO 31000 , "Risk management – Guidelines", the process of risk management consists of several steps as follows: This involves: After establishing
4469-656: The Great Fire of London , which in 1666 devoured more than 13,000 houses. The devastating effects of the fire converted the development of insurance "from a matter of convenience into one of urgency, a change of opinion reflected in Sir Christopher Wren 's inclusion of a site for "the Insurance Office" in his new plan for London in 1667." A number of attempted fire insurance schemes came to nothing, but in 1681, economist Nicholas Barbon and eleven associates established
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4578-710: The Mutual Benefit Life Insurance Company , submitted an article to the Journal of the Institute of Actuaries . His article detailed an historical account of a Severan dynasty -era life table compiled by the Roman jurist Ulpian in approximately 220 AD that was also included in the Digesta . Concepts of insurance has been also found in 3rd century BC Hindu scriptures such as Dharmasastra , Arthashastra and Manusmriti . The ancient Greeks had marine loans. Money
4687-675: The Project Management Institute , the National Institute of Standards and Technology , actuarial societies, and International Organization for Standardization . Methods, definitions and goals vary widely according to whether the risk management method is in the context of project management , security , engineering , industrial processes , financial portfolios , actuarial assessments , or public health and safety . Certain risk management standards have been criticized for having no measurable improvement on risk, whereas
4796-630: The United States each year around age-old models of ad hoc mutual aid. Benefit societies, fraternal benefit societies or "fraternals" are not-for-profit membership organizations that have a representative form of government and are organized through a lodge system, commonly represented in the societies of North America . to carry out social, intellectual, educational, charitable, benevolent, moral, fraternal, patriotic or religious purposes. "Fraternals" provide members with life insurance and other financial protection benefits following state law and use
4905-596: The general average principle of marine insurance established on the island of Rhodes in approximately 1000 to 800 BC, plausibly by the Phoenicians during the proposed Dorian invasion and emergence of the purported Sea Peoples during the Greek Dark Ages (c. 1100–c. 750). The law of general average is the fundamental principle that underlies all insurance. In 1816, an archeological excavation in Minya, Egypt produced
5014-1044: The 1990s. The first PMBoK Project Management Body of Knowledge draft of 1987 doesn't mention opportunities at all. Modern project management school recognize the importance of opportunities. Opportunities have been included in project management literature since the 1990s, e.g. in PMBoK, and became a significant part of project risk management in the years 2000s, when articles titled "opportunity management" also begin to appear in library searches. Opportunity management thus became an important part of risk management. Modern risk management theory deals with any type of external events, positive and negative. Positive risks are called opportunities . Similarly to risks, opportunities have specific mitigation strategies: exploit, share, enhance, ignore. In practice, risks are considered "usually negative". Risk-related research and practice focus significantly more on threats than on opportunities. This can lead to negative phenomena such as target fixation . For
5123-414: The 20th century that mutual aid affiliations predate human culture and are as much a factor in evolution as is the " survival of the fittest " concept. Oaths, secret signs and knowledge, and regalia were historically an important part of many benefit societies but declined in use in most benefit societies during the late nineteenth and early twentieth centuries. Conversely, signs and ceremonies have become
5232-650: The Free African Society was established in 1787 by two African American former slaves , Absalom Jones and Richard Allen. These two men were Methodist converts from evangelical masters, who permitted these men to purchase their freedom in the early 1780s. Mutual aid was a foundation of social welfare in the United States until the early 20th Century. Early societies not only shared material resources but often advanced social values related to self-reliance and moral character. Many fraternal organizations were first organized as mutual aid societies when government at
5341-483: The acceptance technique, the business intentionally assumes risks without financial protections in the hopes that possible gains will exceed prospective losses. The transfer approach shields the business from losses by shifting risks to a third party, frequently in exchange for a fee, while the third-party benefits from the project. By choosing not to participate in high-risk ventures, the avoidance strategy avoids losses but also loses out on possibilities. Last but not least,
5450-502: The appropriate level of management. For instance, a risk concerning the image of the organization should have top management decision behind it whereas IT management would have the authority to decide on computer virus risks. The risk management plan should propose applicable and effective security controls for managing the risks. For example, an observed high risk of computer viruses could be mitigated by acquiring and implementing antivirus software. A good risk management plan should contain
5559-474: The areas surrounding the improved traffic capacity. Over time, traffic thereby increases to fill available capacity. Turnpikes thereby need to be expanded in a seemingly endless cycles. There are many other engineering examples where expanded capacity (to do any function) is soon filled by increased demand. Since expansion comes at a cost, the resulting growth could become unsustainable without forecasting and management. The fundamental difficulty in risk assessment
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#17328513379815668-457: The case of an unlikely event, the probability of occurrence of which is unknown. Therefore, in the assessment process it is critical to make the best educated decisions in order to properly prioritize the implementation of the risk management plan . Even a short-term positive improvement can have long-term negative impacts. Take the "turnpike" example. A highway is widened to allow more traffic. More traffic capacity leads to greater development in
5777-415: The common cause. The term "fraternal" can properly be applied to such an association, for the reason that the pursuit of a common object, calling, or profession usually tends to create a brotherly feeling among those who are thus engaged. *** Many of these associations make a practice of assisting their sick and disabled members, and of extending substantial aid to the families of deceased members. Their work
5886-504: The confidence in estimates and decisions seems to increase. Strategies to manage threats (uncertainties with negative consequences) typically include avoiding the threat, reducing the negative effect or probability of the threat, transferring all or part of the threat to another party, and even retaining some or all of the potential or actual consequences of a particular threat. The opposite of these strategies can be used to respond to opportunities (uncertain future states with benefits). As
5995-429: The consequences occurring during use of the product, or detection of the root causes of unwanted failures that the team can then avoid. Controls may focus on management or decision-making processes. All these may help to make better decisions concerning risk. Briefly defined as "sharing with another party the burden of loss or the benefit of gain, from a risk, and the measures to reduce a risk." The term 'risk transfer'
6104-451: The context, the next step in the process of managing risk is to identify potential risks. Risks are about events that, when triggered, cause problems or benefits. Hence, risk identification can start with the source of problems and those of competitors (benefit), or with the problem's consequences. Some examples of risk sources are: stakeholders of a project, employees of a company or the weather over an airport. When either source or problem
6213-460: The customers of the enterprise, as well as external impacts on society, markets, or the environment. There are various defined frameworks here, where every probable risk can have a pre-formulated plan to deal with its possible consequences (to ensure contingency if the risk becomes a liability ). Managers thus analyze and monitor both the internal and external environment facing the enterprise, addressing business risk generally, and any impact on
6322-435: The decisions about how each of the identified risks should be handled. Mitigation of risks often means selection of security controls , which should be documented in a Statement of Applicability, which identifies which particular control objectives and controls from the standard have been selected, and why. Implementation follows all of the planned methods for mitigating the effect of the risks. Purchase insurance policies for
6431-445: The demand for marine insurance . In the late 1680s, Edward Lloyd opened a coffee house , which became the meeting place for parties in the shipping industry wishing to insure cargoes and ships, including those willing to underwrite such ventures. These informal beginnings led to the establishment of the insurance market Lloyd's of London and several related shipping and insurance businesses. Life insurance policies were taken out in
6540-434: The development of templates for identifying source, problem or event. Common risk identification methods are: Once risks have been identified, they must then be assessed as to their potential severity of impact (generally a negative impact, such as damage or loss) and to the probability of occurrence. These quantities can be either simple to measure, in the case of the value of a lost building, or impossible to know for sure in
6649-771: The early 18th century. The first company to offer life insurance was the Amicable Society for a Perpetual Assurance Office , founded in London in 1706 by William Talbot and Sir Thomas Allen . Upon the same principle, Edward Rowe Mores established the Society for Equitable Assurances on Lives and Survivorship in 1762. It was the world's first mutual insurer and it pioneered age based premiums based on mortality rate laying "the framework for scientific insurance practice and development" and "the basis of modern life assurance upon which all life assurance schemes were subsequently based." In
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#17328513379816758-465: The earnings to fund member-supported community activities. Fraternals are chartered by state law and have been exempt from income tax under Section 501(c)(8) of the United States Tax Code since 1909. Fraternal Benefit Societies trace their lineage back through mutual societies , friendly societies and eventually to medieval guilds . Many fraternal benefit societies were founded to serve
6867-865: The emergency exists. Ad hoc mutual aid associations have been seen organized among strangers facing shared challenges in such disparate settings as the Woodstock Music and Arts Festival in New York in 1969, during the Beijing Tiananmen Square protests of 1989 , for neighborhood defense during the Los Angeles Riots of 1992, and work of the organization Common Ground Collective which formed in New Orleans after Hurricane Katrina in 2005. The Rainbow Family organizes gatherings in National Forests of
6976-503: The enterprise achieving its strategic goals . ERM thus overlaps various other disciplines - operational risk management , financial risk management etc. - but is differentiated by its strategic and long-term focus. ERM systems usually focus on safeguarding reputation, acknowledging its significant role in comprehensive risk management strategies. Benefit society A benefit society , fraternal benefit society, fraternal benefit order, friendly society , or mutual aid organization
7085-669: The event of general average. In 1873 the "Association for the Reform and Codification of the Law of Nations", the forerunner of the International Law Association (ILA), was founded in Brussels. It published the first YAR in 1890, before switching to the present title of the "International Law Association" in 1895. By the late 19th century governments began to initiate national insurance programs against sickness and old age. Germany built on
7194-430: The extent of private charity, says: "New York is, I firmly believe, the most charitable city in the world. Nowhere is there so eager a readiness to help ..." Medieval guilds were an early basis for many Western benefit societies. A guild charter document from 1200 states: This charter shows the importance of 'brotherhood', and the principles of discipline, conviviality, and benevolence. The structure of fraternity in
7303-433: The fact that they only delivered software in the final phase of development; any problems encountered in earlier phases meant costly rework and often jeopardized the whole project. By developing in iterations, software projects can limit effort wasted to a single iteration. Outsourcing could be an example of risk sharing strategy if the outsourcer can demonstrate higher capability at managing or reducing risks. For example,
7412-562: The findings of risk assessments in financial, market, or schedule terms. Robert Courtney Jr. (IBM, 1970) proposed a formula for presenting risks in financial terms. The Courtney formula was accepted as the official risk analysis method for the US governmental agencies. The formula proposes calculation of ALE (annualized loss expectancy) and compares the expected loss value to the security control implementation costs ( cost–benefit analysis ). Planning for risk management uses four essential techniques. Under
7521-670: The first contributory system of insurance against illness and unemployment. This system was greatly expanded after the Second World War under the influence of the Beveridge Report , to form the first modern welfare state . In 2008, the International Network of Insurance Associations (INIA), then an informal network, became active and it has been succeeded by the Global Federation of Insurance Associations (GFIA), which
7630-464: The first fire insurance company, the "Insurance Office for Houses", at the back of the Royal Exchange to insure brick and frame homes. Initially, 5,000 homes were insured by his Insurance Office. At the same time, the first insurance schemes for the underwriting of business ventures became available. By the end of the seventeenth century, London's growth as a centre for trade was increasing due to
7739-418: The float method is difficult to carry out in an economically depressed period. Bear markets 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 underwriting, or insurance, cycle . Claims and loss handling
7848-441: The guild forms the basis for orders such as Freemasonry and other fraternal orders , friendly societies and modern trade unions . Joining such an organization a member gained the 'freedom' of the craft and the exclusive benefits that the organization could confer on members. Historically, benefit societies have emphasized the importance of social discipline, in conforming to the rules of the organization and society, and acting in
7957-416: The impact of the event equals risk magnitude." Risk mitigation measures are usually formulated according to one or more of the following major risk options, which are: Later research has shown that the financial benefits of risk management are less dependent on the formula used but are more dependent on the frequency and how risk assessment is performed. In business it is imperative to be able to present
8066-447: The insurance carrier can generally either "reimburse" or "pay on behalf of", whichever is more beneficial to it and the insured in the claim handling process. An entity seeking to transfer risk (an individual, corporation, or association of any type, etc.) becomes the "insured" party once risk is assumed by an "insurer", the insuring party, by means of a contract , called an insurance policy . Generally, an insurance contract includes, at
8175-773: The insurance company. Insurance scholars have typically used moral hazard to refer to the increased loss due to unintentional carelessness and insurance fraud to refer to increased risk due to intentional carelessness or indifference. Insurers attempt to address carelessness through inspections, policy provisions requiring certain types of maintenance, and possible discounts for loss mitigation efforts. While in theory insurers could encourage investment in loss reduction, some commentators have argued that in practice insurers had historically not aggressively pursued loss control measures—particularly to prevent disaster losses such as hurricanes—because of concerns over rate reductions and legal battles. However, since about 1996 insurers have begun to take
8284-529: The insurance policy is called the premium . If the insured experiences a loss which is potentially covered by the insurance policy, the insured submits a claim to the insurer for processing by a claims adjuster. A mandatory out-of-pocket expense required by an insurance policy before an insurer will pay a claim is called a deductible (or if required by a health insurance policy, a copayment ). The insurer may hedge its own risk by taking out reinsurance , whereby another insurance company agrees to carry some of
8393-413: The insured has an insurable interest established by ownership, possession, or pre-existing relationship. The insured receives a contract , called the insurance policy , which details the conditions and circumstances under which the insurer will compensate the insured, or their designated beneficiary or assignee. The amount of money charged by the insurer to the policyholder for the coverage set forth in
8502-409: 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 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
8611-469: The investments in the London Stock Exchange . 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". In the United States , the underwriting loss of property and casualty insurance companies was $ 142.3 billion in the five years ending 2003. But overall profit for the same period
8720-592: The late 19th century "accident insurance" began to become available. The first company to offer accident insurance was the Railway Passengers Assurance Company, formed in 1848 in England to insure against the rising number of fatalities on the nascent railway system. The first international insurance rule was the York Antwerp Rules (YAR) for the distribution of costs between ship and cargo in
8829-441: The loss and out of pocket costs including, with the permission of the insurer, claim expenses. Under a "pay on behalf" policy, the insurance carrier would defend and pay a claim on behalf of the insured who would not be out of pocket for anything. Most modern liability insurance is written on the basis of "pay on behalf" language, which enables the insurance carrier to manage and control the claim. Under an "indemnification" policy,
8938-450: The loss attributed to war is retained by the insured. Also any amounts of potential loss (risk) over the amount insured is retained risk. This may also be acceptable if the chance of a very large loss is small or if the cost to insure for greater coverage amounts is so great that it would hinder the goals of the organization too much. Select appropriate controls or countermeasures to mitigate each risk. Risk mitigation needs to be approved by
9047-610: The losses that only some insureds may incur. The insured entities are therefore protected from risk for a fee, with the fee being dependent upon the frequency and severity of the event occurring. In order to be an insurable risk , the risk insured against must meet certain characteristics. Insurance as a financial intermediary is a commercial enterprise and a major part of the financial services industry, but individual entities can also self-insure through saving money for possible future losses. Risk which can be insured by private companies typically share seven common characteristics: When
9156-599: The mainstay of fraternal societies that no longer focus as much on mutual aid. Many of the features of benefit organizations today have been assimilated into organizations that rely on the corporate and political structures of our time. Insurance companies, religious charities, credit unions, and democratic governments now perform many of the same functions that were once the purview of ethnically- or culturally-affiliated mutual benefit associations. New technologies have provided yet more new opportunities for humanity to support itself through mutual aid. Recent authors have described
9265-747: The models of fraternal orders such as the Freemasons and the Oddfellows , some coworking communities , and many others. A benefit society can be characterized by Examples of benefit societies can be found throughout history, including among secret societies of the Tang Dynasty in China and African-Americans during the post-revolutionary years, such as those who organized the Free African Society of Philadedelphia . Philadelphia's first black organization,
9374-587: The most part, these methods consist of the following elements, performed, more or less, in the following order: The Risk management knowledge area, as defined by the Project Management Body of Knowledge PMBoK, consists of the following processes: The International Organization for Standardization (ISO) identifies the following principles for risk management: Benoit Mandelbrot distinguished between "mild" and "wild" risk and argued that risk assessment and management must be fundamentally different for
9483-782: The needs of immigrants and other under-served groups who shared common bonds of religion, ethnicity, gender, occupation or shared values. The first modern American fraternal benefit society was the Ancient Order of United Workmen , founded by John J. Upchurch in 1868. "The Order of Knights of Pythias is a great international fraternity which was founded in Washington, DC, February 19, 1864, by Justus H. Rathbone..." The Knights had an "Endowment Rank" which included life, health and disability insurance. As Walter Bayse wrote in his history of fraternals: “the American fraternal system had its beginning as
9592-619: The networked affiliations that produce collaborative projects . In modern Asia rotating credit associations organized within communities or workplaces were widespread through the early twentieth century and continue in our time. Habitat for Humanity in the United States is a leading example of shared credit and labor pooled to help low-income people afford adequate housing. In post- disaster reactions, formal benefit societies of our time often lend aid to others outside their immediate membership, while ad hoc benefit associations form among neighbors or refugees, generally lasting only as long as
9701-789: The organization or person making the risk management decisions. Another source, from the US Department of Defense (see link), Defense Acquisition University , calls these categories ACAT, for Avoid, Control, Accept, or Transfer. This use of the ACAT acronym is reminiscent of another ACAT (for Acquisition Category) used in US Defense industry procurements, in which Risk Management figures prominently in decision making and planning. Similarly to risks, opportunities have specific mitigation strategies: exploit, share, enhance, ignore. This includes not performing an activity that could present risk. Refusing to purchase
9810-400: The person who has been in the accident. The insurance policy simply provides that if an accident (the event) occurs involving the policyholder then some compensation may be payable to the policyholder that is commensurate with the suffering/damage. Methods of managing risk fall into multiple categories. Risk-retention pools are technically retaining the risk for the group, but spreading it over
9919-414: The policy. When insured parties experience a loss for a specified peril, the coverage entitles the policyholder to make a claim against the insurer for the covered amount of loss as specified by the policy. The fee paid by the insured to the insurer for assuming the risk is called the premium. Insurance premiums from many insureds are used to fund accounts reserved for later payment of claims – in theory for
10028-405: The premium collected in order to assess rate adequacy. Loss ratios 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 analyses are sometimes used when multiple characteristics are involved and
10137-508: The primary sources of information. Nevertheless, risk assessment should produce such information for senior executives of the organization that the primary risks are easy to understand and that the risk management decisions may be prioritized within overall company goals. Thus, there have been several theories and attempts to quantify risks. Numerous different risk formulae exist, but perhaps the most widely accepted formula for risk quantification is: "Rate (or probability) of occurrence multiplied by
10246-435: The process of admission, and the rights and privileges of members. A fraternal benefit society operates under a lodge system if it has a supreme governing body and subordinate lodges into which members are elected, initiated, or admitted under its laws. A society has a representative form of government if its supreme governing body is an assembly composed of delegates elected directly by members or intermediate assemblies, or
10355-486: The provisions of Section 38(a)(2) of this Article whether incorporated or not, conducted solely for the benefit of its members and their beneficiaries and not for profit, operated on a lodge system with ritualistic form of work, having a representative form of government, and which provides benefits following this Article, is hereby declared to be a fraternal benefit society. The court's opinion in National Union v. Marlow
10464-404: 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
10573-458: The reduction approach lowers risks by implementing strategies like insurance, which provides protection for a variety of asset classes and guarantees reimbursement in the event of losses. Once risks have been identified and assessed, all techniques to manage the risk fall into one or more of these four major categories: Ideal use of these risk control strategies may not be possible. Some of them may involve trade-offs that are not acceptable to
10682-413: The risks being faced. Risk analysis results and management plans should be updated periodically. There are two primary reasons for this: Enterprise risk management (ERM) defines risk as those possible events or circumstances that can have negative influences on the enterprise in question, where the impact can be on the very existence, the resources (human and capital), the products and services, or
10791-406: The risks that it has been decided to transferred to an insurer, avoid all risks that can be avoided without sacrificing the entity's goals, reduce others, and retain the rest. Initial risk management plans will never be perfect. Practice, experience, and actual loss results will necessitate changes in the plan and contribute information to allow possible different decisions to be made in dealing with
10900-471: The risks, especially if the primary insurer deems the risk too large for it to carry. Methods for transferring or distributing risk were practiced by Chinese and Indian traders as long ago as the 3rd and 2nd millennia BC, respectively. Chinese merchants travelling treacherous river rapids would redistribute their wares across many vessels to limit the loss due to any single vessel capsizing. Codex Hammurabi Law 238 (c. 1755–1750 BC) stipulated that
11009-455: The scope of insurance cover. Insurance can have various effects on society through the way that it changes who bears the cost of losses and damage. On one hand it can increase fraud; on the other it can help societies and individuals prepare for catastrophes and mitigate the effects of catastrophes on both households and societies. Insurance can influence the probability of losses through moral hazard , insurance fraud , and preventive steps by
11118-447: The severity of the loss or the likelihood of the loss from occurring. For example, sprinklers are designed to put out a fire to reduce the risk of loss by fire. This method may cause a greater loss by water damage and therefore may not be suitable. Halon fire suppression systems may mitigate that risk, but the cost may be prohibitive as a strategy . Acknowledging that risks can be positive or negative, optimizing risks means finding
11227-492: The state and local level supplemented private aid societies more than the converse of this being true. In 1890, 112,000 American residents lived in private charitable institutions, while only 73,000 resided in public almshouses. Towards the latter part of the nineteenth century, public aid was reduced as it was seen as contributing to sloth and dependency while private aid was judiciously provided with greater checks for reform and recovery. Writing in 1890, Jacob Riis , commenting on
11336-980: The telephone with settlement authority at a mandatory settlement-conference when requested by a judge. Risk management Risk management is the identification, evaluation, and prioritization of risks , followed by the minimization, monitoring, and control of the impact or probability of those risks occurring. Risks can come from various sources (i.e, threats ) including uncertainty in international markets , political instability , dangers of project failures (at any phase in design, development, production, or sustaining of life-cycles), legal liabilities , credit risk , accidents , natural causes and disasters , deliberate attack from an adversary, or events of uncertain or unpredictable root-cause . There are two types of events wiz. Risks and Opportunities. Negative events can be classified as risks while positive events are classified as opportunities. Risk management standards have been developed by various institutions, including
11445-426: The two types of risk. Mild risk follows normal or near-normal probability distributions , is subject to regression to the mean and the law of large numbers , and is therefore relatively predictable. Wild risk follows fat-tailed distributions , e.g., Pareto or power-law distributions , is subject to regression to the tail (infinite mean or variance, rendering the law of large numbers invalid or ineffective), and
11554-416: The whole group involves transfer among individual members of the group. This is different from traditional insurance, in that no premium is exchanged between members of the group upfront, but instead, losses are assessed to all members of the group. Risk retention involves accepting the loss, or benefit of gain, from a risk when the incident occurs. True self-insurance falls in this category. Risk retention
11663-451: Was $ 68.4 billion, as the result of float. Some insurance-industry insiders, most notably 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". Naturally,
11772-484: Was advanced on a ship or cargo, to be repaid with large interest if the voyage prospers. However, the money would not be repaid at all if the ship were lost, thus making the rate of interest high enough to pay for not only for the use of the capital but also for the risk of losing it (fully described by Demosthenes ). Loans of this character have ever since been common in maritime lands under the name of bottomry and respondentia bonds. The direct insurance of sea-risks for
11881-491: Was formally founded in 2012 to aim to increase insurance industry effectiveness in providing input to international regulatory bodies and to contribute more effectively to the international dialogue on issues of common interest. It consists of its 40 member associations and 1 observer association in 67 countries, which companies account for around 89% of total insurance premiums worldwide. Insurance involves pooling funds from many insured entities (known as exposures) to pay for
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