insurance company

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Insurance Company

A company, which may be for-profit, non-profit or government-owned, that sells the promise to pay for certain expenses in exchange for a regular fee, called a premium. For example, if one purchases health insurance, the insurance company will pay for (some of) the client's medical bills, if any. Likewise, in life insurance, the company will give the client's beneficiary a certain amount of money when the client dies. The insurance company covers its expenses and/or makes a profit by spreading the risk of any one client over the pool of premiums from many clients.

insurance company

a financial institution which UNDERWRITES the risk of loss of, or damage to, personal and business assets (general INSURANCE) and life and limb (life and accident insurance). Some companies specialize in one or other of these areas, but others (referred to as ‘composites’) operate in both sectors. Insurance companies issue insurance policies to cover a variety of contingencies (fire, flooding, breakage, theft, death, etc.), involving potential financial loss to policy holders or their dependants in return for regular payments of a premium. An insurance company operates by pooling risk among a large number of policy holders; premiums are based on the probability of a particular event occurring and the average financial loss associated with each. This is done by the company's actuarial staff using statistical techniques to analyse past claims. For very large insurance risks an insurance company may resort to reinsurance sharing the insurance premium with other insurers in proportion to the share of potential claim which they are prepared to accept. In addition, many insurance companies offer contractual savings schemes (see ASSURANCE).

Insurance companies use the premiums they receive not only to settle day-to-day claims but also to generate additional income and profit by investing their funds in FINANCIAL SECURITIES, particularly UK and overseas government fixed-interest bonds and corporate stocks and shares (see INSTITUTIONAL INVESTORS). Their portfolios attempt to maintain a careful balance between immediate liquidity needs and longer-term investment returns. Life insurance business, in particular, because of its long-term contractual nature, is especially conducive to offering long-term investment returns to policy holders as well as the insurance company. With profit life insurance policies are now commonplace, as are unit-linked policies which are directly related to fund performance (see UNIT TRUST). Life insurance policies linked to the provision of MORTGAGE finance for house purchase are another innovation.

Most insurance companies are members of LLOYDS, a corporation of insurers and INSURANCE BROKERS. Insurance companies in the UK are represented by the Association of British Insurers which provides a forum for the discussion of matters of general concern to members and acts on behalf of members in dealings with other institutional bodies such as the Institutional Investors Committee and the government. The investment and management of funds by insurance companies is regulated by the FINANCIAL SERVICES AUTHORITY in accordance with various standards of good practice laid down under the FINANCIAL SERVICES ACT 1986.

Notably, also the Financial Services Act has enabled insurance companies to broaden the portfolio of services and financial products they are able to offer. Insurance companies such as the Prudential, for example, have set up estate agency chains and offer mortgages, as well as products such as personal pensions, unit trusts and INDIVIDUAL SAVINGS ACCOUNTS (ISAs). This development has introduced a powerful new competitive stimulus into the financial services industry breaking down traditional ‘demarcation’ boundaries in respect of who does what’, allowing insurance companies to ‘cross sell’ these services and products in competition with traditional providers such as BUILDING SOCIETIES, UNIT TRUSTS etc.

insurance company

a financial institution that provides a range of INSURANCE policies to protect individuals and businesses against the RISK of financial losses in return for regular payments of PREMIUMS.An insurance company operates by pooling risks amongst a large number of policyholders. From its past claims record, the company actuary can ascertain the probability of a particular event occurring (for example, a fire) and can assess the average financial loss associated with each event. Using this information, he attempts to calculate appropriate premiums for policyholders and from the collective pool of premium income to meet outstanding financial claims.

For very large insurance risks, an insurance company may resort to reinsurance, sharing the insurance premium with other insurers in proportion to the share of potential claim that they are prepared to accept. In addition, many insurance companies offer contractual savings schemes.

Insurance companies use the premiums they receive not only to settle day-to-day claims but also to generate additional income and profit by investing their funds in FINANCIAL SECURITIES (see INSTITUTIONAL INVESTORS). Life insurance business, in particular, because of its long-term contractual nature, is especially conducive to offering long-term investment returns to policyholders as well as the insurance company With profit life insurance policies are now commonplace, as are life insurance policies linked to the provision of MORTGAGE finance for house purchase.

Most insurance companies are members of Lloyd's, a corporation of insurers. Insurance companies in the UK are represented by the Association of British Insurers, which provides a forum for the discussion of matters of general concern to members and acts on behalf of members in dealings with other institutional bodies such as the Institutional Investors Committee and the government. The investment and management of funds by insurance companies is regulated by the FINANCIAL SERVICES AUTHORITY in accordance with various standards of good practice laid down under the FINANCIAL SERVICES ACT 1986.

Notably, the Financial Services Act has also enabled insurance companies to broaden the portfolio of services and financial products they are able to offer. Insurance companies such as the Prudential, for example, have set up estate agency chains and offer mortgages as well as products such as personal pensions, unit trusts and individual savings accounts (ISAs). This development has introduced a powerful new competitive stimulus into the financial services industry breaking down traditional ‘demarcation’ boundaries in respect of who does what’, allowing insurance companies to ‘cross-sell’ these services and products in competition with traditional providers such as BUILDING SOCIETIES, UNIT TRUSTS, etc. See FINANCIAL SYSTEM, PORTFOLIO, TRACKER FUND, INDIVIDUAL SAVINGS ACCOUNT.

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