Introduction
In the present day, property and liability insurance may be regarded as a common practice for the protection of people’s belongings and health. It allows individuals to mitigate the risks of property loss in the case of perils, such as fire, theft, or accident. In addition, it allows to protect an insured against the financial consequences of unintended negligence that causes other people’s injuries. At the same time, for an in-depth investigation of insurance and the principles of insurance companies’ performance, it is essential to start with basic concepts. Thus, this paper may be regarded as an introduction to property and liability insurance and companies’ risk assessment. The understanding of materials will be ensured through the introduction of real-life examples.
Property Insurance
In general, property may be regarded as the basis of the free market and the system of capitalism. That is why the protection of property, both individual and belonging to a business, is an essential part of this system as well. For instance, if a person has an expensive house destroyed by fire, he may not have enough money to restore his property. However, with property insurance, the homeowner will be paid for the lost facility and all contents as he has protection against such peril as fire.
In the present day, property insurance refers to a considerably broad term for multiple policies that provide property protection coverage for its owners or renters. In other words, it provides financial reimbursement in the case of theft or damage to a facility and its contents. According to Surminski and Eldridge (2017), insurance is “a mechanism where risks or part of a risk are transferred from one party (the insured) to another party (the insurer) in return for a payment (the premium)” (p. 416). In addition, property insurance may include liability coverage – in this case, financial reimbursement is provided for an individual other than a renter or a property owner if he is injured on this property.
As previously mentioned, property insurance provides financial coverage for personal and real property owned by individuals and businesses. It also includes collision coverage within the framework of automobile policies for a car’s damage in the case of an accident and comprehensive coverage for the protection of facilities from fire or vandalism. In addition, coverage is traditionally available at different levels – for instance, the basic insurance policies of homeowners cover damage from perils, including explosions, fire, windstorm, lightning, hail, smoke, civil unrest, riots, vandalism, theft, malicious mischief, vehicular and aircraft accidents, and glass breakage. At the same time, there is a broader, or comprehensive, form of coverage that considers additional perils, such as buildings’ collapse, falling objects, heating, plumbing, or air conditioning systems’ accidental damage, the weight of snow, sleet, or ice, and accidental injury from wiring and electrical appliances.
Nevertheless, even the broadest policy cannot guarantee financial reimbursement in all cases. Thus, the majority of property insurance does not cover extraordinary and extreme circumstances, including earthquakes, tsunamis, seeping groundwater, sewer backups, nuclear radiation, war, and terrorist acts. At the same time, the state of property insurance in relation to floods remains unclear. On the one hand, it is not included in comprehensive coverage, especially in places where floods are common. On the other hand, in these places, the absence of property protection leads to the stagnation of economic development (Surminski & Eldridge, 2017). In this case, scientists believe that flood insurance in particular countries vulnerable to floods, such as England or Germany, is necessary (Surminski & Eldridge, 2017; Surminski & Thieken, 2017). First of all, it will ensure regions’ economic development as the risks of investments will be partially mitigated. Moreover, flood insurance will contribute to the elaboration of measures for the prevention of floods rather than focusing on the efficiency of response in the case of an emergency.
Liability Insurance
In contemporary society, liability insurance is substantially important for both businesses and individuals as it covers particular legal liabilities of business executives, professionals, and homeowners that may occur during daily activities. In general, liability insurance may be regarded as an insurance policy that protects against claims resulting from people’s injuries or property damage. It covers all legal payouts and costs of an insured party it is legally liable. In general, liability insurance is similar to property insurance to some extent – thus, they are frequently included in the same insurance package. For example, automotive insurance may go with liability insurance to cover other people’s injuries and a car’s damage in the case of an accident.
The use of liability insurance may be presented in the case when a man is invited by his friend to his house, where he accidentally slips on the wet floor, falls down, and breaks his hand. Being initially an insignificant injury, it nevertheless causes substantial complications during surgery. Thus, the man is seeking $100,000 from the homeowner for disablement compensation, medical assistance, and rehabilitation. His attorney argues that the safety of the house’s environment is the homeowner’s responsibility represented in a liability. However, while the homeowner worries about inevitable expenditures he cannot afford, his attorney tells him that his insurance policy includes a liability component, and he is protected against this lawsuit. Called third-party insurance, liability insurance is crucial for the protection of an insured for non-intentional property damage or other people’s injuries. At the same time, it does not cover contractual liabilities and intentional damage as a result of a criminal act. Thus, liabilities policies protect both the third party and an insured in the case of the latter’s unintentional negligence.
Principles of Insurance
Property insurance has several distinguishable principles for its application and purchasing, and one of the most important from them is an insurable interest. In other words, an insured individual who purchases property insurance should have a real interest in the property, and its loss will affect him. Thus, property insurance should be based on ownership or investments. For instance, a person cannot place a policy on a random shop if he has no connection with it and does not suffer any economic loss in the case of its damage. However, if he owns this shop or invests in its development, he has an interest required for property insurance.
One more basic principle of property insurance is utmost good faith. According to it, both an insurer as an insurance company and an insured as a policy holder should act on the basis of honesty, mutual respect, and ethics, providing full information concerning a contract’s terms and conditions. This principle aims to prevent unfair and illegal activities of both parties. While an insurer may provide misrepresented or falsified information to avoid financial reimbursement, an insured may try to use property insurance for illicit enrichment.
Another principle is subrogation, and it partially explains the algorithm of an insurance company’s performance. Subrogation is the substitution of an insurer by the third party responsible for an insured’s loss. For instance, if a person’s car is damaged by another driver, an insurance company will file a claim against this driver who caused the accident. In general, subrogation benefits both parties as an insured receives financial reimbursement while an insurer pays for a policy holder and receives extra money for acquiring coverage. At the same time, there are cases when subrogation is challenging or impossible as there is no third parties, especially when natural disasters occur. That is why environmental calamities are frequently excluded from property insurance policies. However, in the case of property insurance that covers natural disasters, compensation is formed by the government and the insurance sector (Dubbelboer et al., 2017). For instance, in the United Kingdom, flood insurance is covered by the public-private partnership on the basis of investments in high-risk areas.
Another principle refers to proximate cause, and it is an incident the damage from which will be compensated by an insurance company. Purchasing property insurance, an individual selects proximate causes that will be covered by it. In the case of the damage, an insurance company should investigate whether it was caused by an identified proximity cause or not, and if an incident is covered, an insurer should pay. At the same time, the property cannot be insured against all possible causes.
One more principle of property insurance is indemnity which refers to an insurer’s guarantee to compensate an insured’s loss according to their contract’s terms. In addition, according to them, compensation is paid for unexpected events, the occurrence of which is recorded as a reason for reimbursement in order to avoid illicit enrichment from losses. Moreover, compensation is equal to the incurred loss regardless of the total amount of insured money. For instance, if a house is insured for $1 million, but the cost of damages is $5,000, an insured will receive $5,000. The principle of indemnity is expanded by the principle of contribution, which states that compensation is based on responsibility according to all insurance contracts. For instance, if a person has three insurance contracts with three different insurance companies for his car, in the case of its damage, all companies should share compensation on the basis of a total sum reflected in contracts if all contracts cover this proximate cause.
The final principle of insurance refers to loss minimization and an insured’s responsibility in relation to it. In other words, an insurance company is responsible for compensation when the damage is caused by an identified proximate cause. However, an insured is responsible for precautions to minimize the risks of property loss. Otherwise, an insurance company may identify the occurrence of damage as an insured’s intention to cause it for illicit enrichment.
Risk Assessment by Insurance Companies
In general, risk assessment is immeasurably important in the insurance industry. It helps recognize and examine possible events that may cause a loss in the future and ensure accurate and informed decision-making in relation to potentially risky situations. At the same time, the assessment of external risks is directly connected with the assessment of external risks referred to a company’s capacity to cover perils in relation to a particular number of insured individuals, especially when subrogation is challenging or impossible. Without a risk assessment, an insurance company’s performance may be involved in colossal damage that cannot be compensated.
Risk assessment in the insurance industry may also be called underwriting. It involves the organization of research for the evaluation of all potential risks and their degrees that may be brought by an applicant. Underwriting helps establish an appropriate premium amount in order to cover policy holders’ costs adequately, and in the case of high risks, coverage may be refused. With the use of various technologies and the collection of data, insurance companies create the risk profile of every policy holder.
In the present day, the insurance industry is among the most innovative spheres across the globe. In general, innovations and the use of technologies have become the main advantage that determines companies’ successful performance and stable development in a highly competitive market. At the same time, according to Klapkiv and Klapkiv (2017), “the asymmetry of information between a client and an insurer is the driving force behind innovation in the insurance market. Innovation is the answer to the imperfection of existing interconnections in the insurance market, which prevents market participants (insurers, reinsurers) from reducing their risks and maximizing their productivity” (p. 68). For insurance companies, innovations mitigate risks related to the provision of incomplete or non-reliable information and contribute to their risk assessment.
In particular, insurance companies implement big data and predictive analytics and modeling for the enhancement of the accuracy of risk assessment. These innovations facilitate the mining, structuring, and combining of policy holders’ data for the accurate prediction of their risk profiles. In addition, insurance companies apply artificial intelligence for the prediction that determine risk assessment. For instance, using various programs, systems, and devices, insurance companies may determine the amount of premium in the case of car insurance on the basis of information related to the vehicle’s current state, its use, and the driver’s behavior on the road. If data demonstrates that the possibility of damage as a result of an accident is high, it is non-beneficial for an insurer to provide coverage or raise the amount of a premium for an insured. In the same way, an insurance company will be unwilling to protect the house if carbon monoxide or smoke meters indicate a high risk of fire. Thus, the assessment of potential risks, especially with the use of modern technologies, on the basis of the analysis of collected data allows insurance companies to decide whether the property should be insured or the risk of compensation is too high.
Conclusion
This paper provides all essential information concerning the nature of property and liability insurance along with its core principles that determine the performance of insurance companies, such as insurable interest, utmost good faith, subrogation, indemnity and contribution, proximate cause, and loss minimization. The understanding of information is ensured by the presence of comprehensive examples of real-life events. In addition, the paper introduces insurance companies’ risk assessment, its purpose, and basic means, such as big data and predictive analytics, modeling, and the use of artificial intelligence. This introduction may be used as the basis for further in-depth research of companies’ risk management and the tools used for it.
References
Dubbelboer, J., Nikolic, I., Jenkins, K., & Hall, J. (2017). An agent-based model of flood risk and insurance. Journal of Artificial Societies and Social Simulation, 20(1), 1-26. Web.
Klapkiv, L., & Klapkiv, J. (2017). Technological innovations in the insurance industry. Journal of Insurance, Financial Markets and Consumer Protection, 26(4), 67-78.
Surminski, S., & Eldridge, J. (2017). Flood insurance in England–an assessment of the current and newly proposed insurance scheme in the context of rising flood risk. Journal of Flood Risk Management, 10(4), 415-435.
Surminski, S., & Thieken, A. H. (2017). Promoting flood risk reduction: The role of insurance in Germany and England. Earth’s Future, 5(10), 979-1001. Web.