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Different Type of Insurance & Insurance Pooling - Principles of Insurance, B com | Principles of Insurance

All too often we hear about various types of insurance policies without really understanding what they are and more importantly, what they protect. The truth is, there are two main types of insurance, namely life insurance and general insurance which covers different aspects in your life.


Life insurance : is an insurance coverage that pays out a certain amount of money to the insured or their specified beneficiaries upon a certain event such as death of the individual who is insured. This protection is also offered in a Family takaful plan, a Shariah-based approach to protecting you and your family.

The coverage period for life insurance is usually more than a year. So this requires periodic premium payments, either monthly, quarterly or annually.

The risks that are covered by life insurance are:

  • Premature death
  • Income during retirement
  • Illness

The main products of life insurance include:

Different Type of Insurance & Insurance Pooling - Principles of Insurance, B com | Principles of Insurance

  • Whole life
  • Endowment
  • Term
  • Investment-linked
  • Life annuity plan
  • Medical and health


General insurance : is basically an insurance policy that protects you against losses and damages other than those covered by life insurance. For more comprehensive coverage, it is vital for you to know about the risks covered to ensure that you and your family are protected from unforeseen losses. 

The coverage period for most general insurance policies and plans is usually one year, whereby premiums are normally paid on a one-time basis. 

The risks that are covered by general insurance are:

  • Property loss, for example, stolen car or burnt house
  • Liability arising from damage caused by yourself to a third party
  • Accidental death or injury

The main products of general insurance includes:

 

Different Type of Insurance & Insurance Pooling - Principles of Insurance, B com | Principles of Insurance

  • Motor insurance
  • Fire/ Houseowners/ Householders insurance
  • Personal accident insurance
  • Medical and health insurance
  • Travel insurance

 

Insurance Pooling

Insurance pooling is a practice wherein a group of small firms join together to secure better insurance rates and coverage plans by virtue of their increased buying power as a block. This practice is primarily used for securing health and disability insurance coverage. Those doing insurance pooling are often referred to as insurance purchasing cooperatives.

Small business enterprises have long complained that insurers hand out discounts to big clients, who have substantial purchasing power and large numbers of employees, and that those insurers too often try to make up those discount losses by hiking rates for their smaller clients. Unable to buy good coverage on their own, smaller companies were forced to rely on pooling plans created and managed by trade associations or other affiliated business groups, or pass on providing coverage altogether. In recent years, however, another alternative, in which private businesses band together and organize their own pools, has emerged. Distinct entities have been created to address both health and disability coverage needs.

 

Health Insurance Pools

Health insurance coverage has long been a difficult benefit for many small businesses to incorporate into their compensation packages. Premiums for even modest health packages constitute a significant outlay for small businesses, and increases in premiums and deductibles attributable to employee illness forced many owners with the unpleasant choice of placing their business at financial risk or ending health insurance for their employees. "Insurers had come to evaluate small firms separately by such factors as claims experience, worker's health status, and even type of business," explained Nation's Business. "As a result, many small companies couldn't buy health insurance at any price. Those that did have coverage lived in fear of a single serious illness because it could trigger skyrocketing rates or cancellation of coverage."

Health insurance pools, which are also sometimes called insurance purchasing alliances or health insurance purchasing co-ops, were originally created to address this problem. They provide group health policies exclusively to small businesses. Rules governing these alliances vary from state to state, with some states offering eligibility to sole proprietorships and others providing coverage to businesses with up to 100 employees. On average, however, these health insurance pools target employers of three to 50 people.

Small businesses that join one of these pools can typically count on the following benefits:

  1. A community premium rate that is significantly lower than any individual rate it could demand, because the membership gains collective leverage that forces insurance carriers to modify premium and deductible demands

  2. In many cases, premium increases are capped for the first several years of the policy

  3. Centralized administration of the policy among all of companies covered under it, which results in savings in work hours and paperwork

  4. Standard rates and benefits that do not fluctuate according to company size or work force health history

  5. Selection of plans from multiple insurers (some plans allocate plan selection power exclusively with employers, while others allow workers to select from a menu of plans)

First tried in California in the early 1990s, these types of pools could be found in 15 states by the early 2000s. In addition, several more states are slated to open their doors to such pooling strategies over the next few years. Analysts warn, however, that the rules and regulations governing health insurance pools vary considerably from state to state, and note that the laws of a number of states make it unlikely that these alliances will make an appearance within their borders any time soon. "Because they are usually locally based and privately operated, health co-ops or alliances have evolved quite differently in the 15 states where they are functioning," explained Stephen Blakely in Nation's Business. "For instance, California's co-op plan is run by an independent state agency that defines the benefits and negotiates with insurers. Florida and Texas have less state control and permit more autonomy among alliances. In New York and some other states, local business-sponsored health alliances operate on their own'¦. Some states have long-standing laws expressly prohibiting businesses from coming together to obtain insurance. Other states have not enacted laws that would enable small firms to buy health insurance regardless of their workers' health status, that would limit insurance-rate variability between companies of similar size and labor characteristics, and that would prohibit insurers from canceling small groups' coverage without cause."

 

Disability Insurance Pools

Disability insurance pools, also called risk-purchasing groups, operate under the same guiding principles as health insurance alliances—by joining together into one single negotiating group, small businesses can increase their bargaining power when dealing with insurers. These groups are usually composed of companies that hail from the same industry sector, and thus face many of the same disability risks.

These disability insurance pools arose in the aftermath of the 1986 Risk Retention Act, which was passed by Congress in an effort to address the growing inability of small business owners to obtain liability insurance because of its rapidly growing cost. "Risk-retention groups enable companies in the same industry, such as plastics or chemicals, to cut insurance costs by forming what are, in effect, mini insurance companies to self-insure against liability claims," explained Lynn Woods in Nation's Business. "Risk-purchasing groups, on the other hand, permit group purchasing of liability coverage."

Interestingly, insurance companies have been among the biggest boosters of this new type of disability coverage arrangement. Woods pointed out that "insurance companies find risk-purchasing groups attractive prospects because the companies can save costs in two ways—by using a single agent or broker for multiple states and by tailoring a policy for a group based on a similar level of risk."

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FAQs on Different Type of Insurance & Insurance Pooling - Principles of Insurance, B com - Principles of Insurance

1. What are the different types of insurance available?
Ans. There are several types of insurance available, including: 1. Life Insurance: Provides financial protection to the insured's family or beneficiaries in case of their death. 2. Health Insurance: Covers medical expenses and provides financial assistance for healthcare services. 3. Auto Insurance: Protects against financial loss in case of damage or theft of a vehicle, as well as liability for injuries caused to others. 4. Home Insurance: Covers damages or losses to a home and its contents, including theft, fire, or natural disasters. 5. Travel Insurance: Provides coverage for unexpected events while traveling, such as trip cancellation, medical emergencies, or lost luggage.
2. What is insurance pooling?
Ans. Insurance pooling is a concept in which individuals or entities collectively contribute funds to form a pool, which is then used to pay for potential losses or claims. By pooling resources, the risk is spread among a larger group, reducing the financial burden on any single participant. Insurance companies use this principle to provide coverage to a large number of policyholders and ensure that claims can be paid out.
3. How does insurance pooling work?
Ans. Insurance pooling works by bringing together a large number of policyholders who pay regular premiums into a common fund. This fund is managed by the insurance company and is used to cover the losses or claims of the policyholders. Only a portion of the pool's funds is required to pay for the claims, as not all policyholders will experience a loss simultaneously. The remaining funds are invested to generate income for the insurance company.
4. What are the benefits of insurance pooling?
Ans. The benefits of insurance pooling include: 1. Risk Sharing: By pooling resources, individuals can share the financial burden of potential losses, reducing the impact on any single participant. 2. Affordability: Insurance pooling allows individuals to access coverage at a lower cost since the risk is spread among a larger group. 3. Financial Security: Insurance pooling provides a safety net against unexpected events, offering peace of mind and protection for individuals and businesses. 4. Claims Payment: Insurance pooling ensures that there are sufficient funds available to pay for claims promptly, providing timely compensation to policyholders.
5. What are the principles of insurance?
Ans. The principles of insurance include: 1. Utmost Good Faith: Both the insured and the insurer must act honestly and disclose all relevant information when entering into an insurance contract. 2. Insurable Interest: The insured must have a financial interest in the subject matter of the insurance policy. This ensures that insurance is not used for speculative purposes. 3. Indemnity: Insurance aims to compensate the insured for the loss suffered, providing financial restoration to the pre-loss position, without allowing a profit. 4. Subrogation: If the insurer pays a claim, they are entitled to take legal action against any third party responsible for the loss to recover the amount paid. 5. Contribution: If the insured has multiple insurance policies covering the same risk, each insurer shares the loss proportionately to avoid overcompensation.
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