Know about Classic car Insurance

Classic car insurance is a special type of insurance available for people with collector vehicles. These types of cars include antiques, classics, custom cars, and replicas among other types. There are usually specialized insurance companies that provide classic car insurance. These companies have their own agents or else, a broker might also have these types of policies.
Typically, a car insurance broker has information regarding all kinds of insurance available in the market. If a classic car owner goes to the agent of a regular car insurance company, he or she may refuse to insure the classic car. The reason for this is that not many regular companies insure classic cars. Therefore, a classic car insurance broker is the best person to approach for a comprehensive rates comparison.
Another advantage of going to a broker is that he or she will provide impartial comparison of rates offered by many companies. On the other hand, an agent for a particular company will only have information regarding that particular company. A classic car insurance broker also understands the specific needs of the car owner and can explain various terms such as limited mileage car insurance or no claims discount car insurance.
A classic car insurance broker helps the car owner select the best policy based of many factors. These factors are type of car, usage, location, driving history of the owner, number of drivers listed, age of drivers and age and value of the classic car. The next important job of the broker is to advice the car owner regarding the right amount of deductible that must be opted for. A deductible is the amount the car owner has to pay in case of a claim. Higher the deductible, lower is the premium, and so choosing the correct deductible option is vital for the car owner.
Though brokers provide excellent comparisons, it is advisable to gather some basic information through websites or other sources before approaching the broker. This allows better understanding of terms and conditions and enables the car owner to determine of budget for purchasing the policy.

Get profits from Real estate

The hottest space in the market for the last 12-15 months has been real estate. It's been phenomenal the way some of these stocks have moved up, much to the disbelief of most of the observers.

The rise has been absolutely astronomical in many of the real estate stocks from the start of this year. How do you value real estate stocks because most people do not seem to understand how to look at this sector and how to value companies here. While some look at cash flows, others look at land banks. But there is a little lack of clarity in how to look at this sector.

Manish Chokhani, director, Enam Securities and Arvind F Pahwa, MD, JP Morgan Asset Management gives their views on how to approach the real estate sector now.

According to Chokhani, offtake rate, selling price, developers' credibility, ability to deliver are key for residential property valuation. It is also important to factor in title issues while valuing property. Chokhani forecasts realty companies to account for 10-15 per cent of market cap in few years.

Arvind F Pahwa believes that one needs to consider quality and the location of land bank for valuation. He feels that the current valuation of real estate companies is reasonable. He expects oversupply in the real estate market due to cyclicality of the business.

Excerpts from CNBC-TV18's exclusive interview with Manish Chokhani and Arvind F Pahwa:

Some say it's crazy, some say it's still undervalued and some are just confused on how to do it - what is the best way to approach this sector now?

Chokhani: Well, all three are right. In a way, it's probably among the easiest things to value and if one breaks it down in common sense terms, there is a value for land and there is a land bank therefore, which is NAV based.

Then, there is a developer who has a developer margin that normally should be cash flow based or a quick thumb rule that people use is EV/EBITDA. When you are able to lease out the whole aspect eventually into REET (Real Estate Excise Tax), which we still don't have in India. They will effectively be valued as bonds giving you a fair stream of rentals. So if you break down companies on that basis, it is fairly simple, it is not so complex.

What kind of a market cap or enterprise value would it give a business, which has 1000 crore (Rs 10 billion) of land bank. What is the right way - because right now, what the market is probably trying to do is, if you have 1000 crore of land bank, it could arrive at something close to Rs 1000 crore in terms of market cap as well?

Chokhani: Currently, the market seems to be valuing Rs 1000 crore more than it actually is. Let me give you some perspective - think of the cheapest space that any developer or land owner sells in the country. It would probably be an IT park, it's probably the cheapest rental, probably Rs 35 a square foot for a month, thereby implying about a 4000-4,500 per square foot capital value for developed space.

If you knock out about Rs 1,500 odd for cost of development and about Rs 500 as developer margin, effectively the land acquisition cost to build an IT park, can be upto Rs 2000 per square foot. If you take that Rs 2000 per square foot and divide and make it back to an acre, which is roughly Rs 50,000 square foot an acre, in effect, one can buy land at 2000 times 50,000, which is is about Rs 10 crore (Rs 100 million) per acre and still turn a profit.

Now to put that into context, one can buy agricultural land, which lot of our IT companies have done on the outskirts of Mysore or Bangalore, starting from Rs 10 lakh. So it's literary a scale of 1:100 from unexplored, undeveloped land to land, which eventually becomes developed.

I am not saying that all the parks will get developed, will get sold and will get filled, so you will have a capacity mismatch there. But how do you value it - do you value it at Rs 1 crore per acre or at Rs 10 lakh per acre or at 10 crore an acre?

That's really where the struggle is and I think it's early days for the market. One doesn't know how many of these will get built like it happened with malls, similarly with IT parks or a lot of townships and residential projects, which are coming up. That's what everybody is grappling with.

In that sense, how do you differentiate between a company that's just sitting on a land bank - like a developer, who will go on to get rental income from it and another, which is perhaps focussing on those large SEZ projects that we have been hearing so much about?

Chokhani:  The developers could, for instance, buy land, which got sold in the textile mill area in Mumbai, which at that time, looked like absurd values. But if you do make this Rs 1,500 cost of development ballpark for low-end stuff and add Rs 500 developer margin, if you can make this Rs 2000 spread as a developer, you are pretty much going to get EV/EBITDA like an engineering, construction type of company.

For the land bank owner, like I said, it is the game of how one can equalise the value of land, which one is getting with the space, which people will buy, and the variables there will then be the rate of offtake at which one can sell it. As regards to an SEZ developer, in theory that they could be buying land at Rs 10 lakh an acre.

If over the next 10-15 years, the value of this goes up to even half of Rs 10 crore per acre, which I mentioned, the value captured is enormous over here. So one can afford to wait and play the waiting game.

How is it that you would go about valuing all these real estate companies and what are the parameters you would set out to give it any sort of market cap?

Pahwa: I would agree with Manish as far as the methodology is concerned. But I think the devil is in the details - somebody is buying agricultural land, there is lot of work to be done between converting that basic raw material into a finished product.

Many agricultural lands may get converted or may not get converted. Each state has its own local regulations, the FSI rules vary from state to state and even within a city, they vary from a particular zone to another. So while valuing real estate, I think various other parameters also need to be considered.

One needs to look at the quality of the land bank - where exactly it is located, whether it can be converted into usable constructible space or not and then factors like who is the developer, what kind of expertise does he have, does he have the capabilities of delivering such large square footage within that particular period.

I think these are some of the very important factors. I would look at qualitative factors, such as the quality of construction and what kind of construction is happening. I would look at all these factors rather than simply looking at the numbers, such as converting Rs 10 lakh per acre land into a finished product by adding a construction cost of Rs 1500.

The construction cost also can vary from Rs 1000-1800. It depends on how the cost of cement, steel and labour has been moving up. This also varies from city to city, from one location to the other. I would definitely give weightage to all these factors.

Also, while valuing real estate, we see that in projections, while doing the discounted cash flow or arriving at NPV, we simply take a projection of increase in the price by 5 per cent per annum. Let's understand that real estate is a cyclical business, it goes to its own cycles.

Just five years back, in 1995, when the crash happened, in Bandra-Kurla Complex a plot of land was sold at a particular price and in fact it's only now that the price has been matched. So obviously, you cannot have a situation where the prices of real estate will keep going up by 5 per cent per annum.

For a company, which has land bank of 5,000 crore, and does not intend to make either an SEZ or an IT park out of it, but simply wants to make residential buildings out of it and sell them. How would you value those companies?

Chokhani: I agree with what Arvind Pahwa had to say that it's just not enough to have the land and take the rate at which you can do the construction and the rate of offtake at which occupancy can be filled up in that project.

One needs to see whether this developer can actually be developed and sold, what the reputation of the developer is, and therefore what price he may attract as opposed to the building, which may be right next to him and so on. Of course the biggest problem in India is about title and no one knows for sure whether the land one is sitting on actually has got clear title.

But assuming all that is taken care of, as regards to residential property, you may tend to sell at these kind of prices upwards of Rs 4,000. You may tend to spend a little more on building amenities over there, so then the Rs 1,500 benchmark construction cost may now be Rs 1,800-2,000. The key variable, therefore, now becomes rate of offtake of the project and the price at which it can go.

As a buyer, what you typically will do is build cushion for some margin of safety. What seems to be happening currently though is that people are assuming that projects will be completed on time, they will all get sold 100 per cent, they will get the prices they want.

And as Arvind rightly said, we will continue to have 5 per cent escalation. My guess is, at some point, this market will get over supplied and it is a cyclical business. Where we are currently, seems to be where the stock market was in 1990-91 where the sector opened up and everyone went crazy and ga-ga. There was this error of optimism resulting, in many cases, peculiar valuations, while in some cases, attractive opportunities.

I think that's really a fair summary of where the sector is today. And again, like Arvind rightly said, the devil is in the detail but you must have your big picture right before you start delving into details.

Do you see a problem from the demand side at all because some people have been making the point that maybe the assumption that all of it is getting built will be sold very easily at current to better rates, which might not be a fair assumption and maybe the purchasing power is being overestimated, particularly in some of the metro locations in the country, is that a fair bit of skepticism or not?

Pahwa: There is a basic demand and I think the way the economy is growing, it is a good story. If the GDP continues to grow at 8-9 per cent, there would always be a demand for good quality real estate. But beyond a price, of course, there is always an issue.

Today, we hear of prices in South Mumbai of Rs 60,000 per square feet, how many people can afford to buy that? But if there are going to be just handful of buildings with that kind of product, then yes, they would be sold. But it is all a question of supply and Mumbai, for that matter, is a very peculiar case.

But the way the supply is going up in other cities, in real estate, there is always a time lag when demand comes in, you cannot have a product available. It takes atleast 2-2.5 years before the project is completed to give it to the tenants or the buyers and that supply is coming up with all cities where this demand was there - be it in Bangalore, Hyderabad, Pune, Chennai or Kolkata.

The present situation, as far as this year is concerned, the absorptions are pretty good. But what we have to wait and watch is how last quarter of 2007, 2008 onwards, the situation will be.

A city like Bangalore, which had absorption of 10 million sq.ft of space last year, which is comparable to the highest in the world and is in the second year in running, whether we will continue to absorb that kind of space? - I am not so sure.

Till few years ago, Bangalore was the only city where IT companies were moving in. They did not have another option but today, there are cities like Hyderabad and Chennai, which are developing its own IT hubs and so are Gurgaon, Chandigarh, Jaipur and so there are so many options available.

So obviously, there will be compression on yields. One can see that in many residential and commercial spaces, where yields have gone down to as low as 6% or in some cases, even lower than that.

And so when yields go down to such low levels, there is always an option available for the user to take it on rent rather than buy and that is further substantiated by the fact that the interest rates have gone up, the capital from banking system is not so easily available as it was few months back.

For those who are into development or rentals, do you accord a premium in terms of geography or location in those that focus on tier I cities or maybe even have a more pan-India presence versus the others?

Chokhani: Yes of course, for some one who is very region specific may tend to go through a boom in the cycle if a particular region gets over built. To step back a bit - think of this as a cement business. In theory, you can build out a cement plant for $60-70 million per million tonne.

But the reality is that the stock market seems to be valuing this at $150-200 per million tonne. This is happening because like real estate, there is a period of shortage and probably '06-'07 are bonanza years in terms of profits. One almost inevitably knows that in 2009, you will see oversupply here and if one is valuing it today or not.

So those are the set of dilemmas that one deals with and like a cement company, if you are only operating in Andhra Pradesh, as opposed to someone who is operating all over India, surely your valuations will be different.

Similarly if you are going to operate one plant and not expand as opposed to someone who is going to expand and build more capability and thereby become a larger leading player in the business, surely your valuations will differ as well.

So it is exactly the same valuation principles - it just seems to look like a new asset class. But I am sure markets will get its hand around it very quickly and it is probably in a simplistic sense a very easy sector to value.

But if you had to look at investing in the listed stocks without naming any specifics, how do you marry the two? Do you think that it will move in tandem with the stock markets cycle or do you think it is part of the longer multi year run on real estate and hence invested it and hope to see even higher levels?

Chokhani: It is a multi year run and though one cannot agree with all the price, but again I want to just give you big picture here and not specific numbers right now. Our market cap for India is about $800 billion and one knows if you look across the region and across what is happening to our country and our GDP and so on, it is a very reasonable bet to say that 10-15 per cent of market cap will belong to real estate type companies.

This is very much the way one could take a view very early on telecom or power and so on that these would be large significant portions of market cap. So in theory, there is $80-100 billion of market cap available for this space and there is appetite certainly from the capital markets side for people like that.

Today, probably, there is just Unitech, which is about $10 billion and the rest are really much smaller companies. A lot of this gap will get filled up by issuance but a couple of people, who like Arvind said earlier, if you are able build the right brand image and the right pan India presence, these people will get valuations, which are going to be disproportionate to what the rest of the pack will do.

Again very similar to the cement sector, you always have Gujarat Ambuja at a premium as opposed to somebody else. Similar things will happen here. I am not suggesting that the valuations today makes sense. It probably is the first burst of euphoria, where a sector has opened up - no one knows how to value it really and a lot of things are getting overdone.

As a value buyer, are you seeing margin of safety in most of these names? I would think not. Having said that, you don't need to necessarily look at listed ones because there are a whole host of companies, which are going to approach the market and that maybe another way to get into this space.

A quick thought from you on how some of these listed companies are valued today because as we were discussing earlier some of these seem to be priced for a completely perfect scenario because they are getting market caps which are better than the land banks that they own at current market prices and at very high market prices, would you agree with those kind of valuations?

Pahwa: Real estate is the flavour of the month. So obviously, it is getting much more visibility compared to many other sectors. Again having said that, it goes both by the stock markets sentiment and as well as the basic demand in real estate.

For the real estate sector, both the things are doing very well today; the stock market sentiment is very positive, the sector variables are very positive. So looking at both these things, as on today, the valuation seems to be reasonable. But with one dip happening, how these valuations would change, I really cannot make any judgment on that.

But as I said earlier, being a cyclical business, there is bound to be some kind of an oversupply, which is again good and healthy for the market because till now you had a situation where vacancy rates in most places were practically zero or negative.

Buildings were pre-leased even before they were completed. Now, you will have a situation where the tenant has a choice to take the buildings on lease, you already have situations in many micro markets where there are lease free periods being made available for doing the interiors.

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Advantages of taking a Mortgage Insurance

The only thing certain about life is that nothing about it is. Somebody may borrow to buy a house and be very diligent about paying the EMIs. But what if he meets with an untimely death? Not only does his family have to deal with the emotional loss, but also with the goons from collection agencies who will descend upon the family to collect the skipped EMIs. A cover equal to the value of the loan is essential to protect the future of his family.

The person might say that he has already got a term cover. But that is for income replacement and for meeting the living costs and other financial goals of his family. This one is an extra cover that he needs. Mortgage insurance is relatively new in India and of the 14 life insurance companies in the market, only MetLife Insurance, HDFC Standard Life Insurance, Allianz Bajaj, Reliance Life Insurance and SBI Life Insurance offer this cover. TATA AIG provides it only through its group policy.

Loan cover term assurance policies, as the plans are called, work like this: to protect a loan repayment schedule, they offer a cover that decreases as the value of the loan outstanding falls. The premium, however, remains the same for the entire duration of the cover. You can pay either a single premium or annual regular ones. If you take the regular premium plan, the premium paying term is only two-thirds of the policy term.

In a regular plan, you can terminate the cover if you pay off the loan sooner than the loan term. A single premium would actually be a loss if the term of your cover comes down due to prepayment of the loan. Upon the borrower's death, the insurance company pays the outstanding amount of the loan to the bank. Remember to avail the same Section 80 C tax break on this one as you get on other life polices.

Sounds good, but we find that it is actually cheaper to buy a pure level term cover instead of this specialised product. The only difference is that you may be insured for more than the loan outstanding after a certain number of years.

With little difference in premium between the two (see Demystifying Home Loan Covers), why not go for a higher cover with a pure level term? In the event of an untimely death, the outstanding home loan amount can be settled from the term plan and the balance term insurance amount remains with the family.

Tax kick: Deduction u/s 80C up to Rs 100,000 from the total income.

Demystifying Home Loan Covers
The difference in premium outgo of loan cover and pure term plans is marginal. So go for pure term.
	Loan Cover Term Plan1		Pure Term Plan
	Annual premium option	Single premium option	Annual premium option	Single premium option
Sum assured (Rs)	20,00,000	20,00,000	20,00,000	20,00,000
Premium (Rs)	8,630	44,260	5,590	51,720
Loan term (yrs)	15	15	15	15
Premium paying term (yrs.)	10	Once	15	Once
Total outgo (Rs)	86,300	44,260	83,850	51,720
Figures for HDFC Standard Life Insurance policies for a 30-year-old individual 1If a Rs 20-lakh loan is being covered, the cover keeps going down as the loan instalments are paid off.

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Different types of insurance companies

Insurance companies may be classified as

* Life insurance companies, who sell life insurance, annuities and pensions products.
* Non-life or general insurance companies, who sell other types of insurance.

In most countries, life and non-life insurers are subject to different regulations, tax and accounting rules. The main reason for the distinction between the two types of company is that life business is very long term in nature — coverage for life assurance or a pension can cover risks over many decades. By contrast, non-life insurance cover usually covers a shorter period, such as one year.

Insurance companies are generally classified as either mutual or stock companies. This is more of a traditional distinction as true mutual companies are becoming rare. Mutual companies are owned by the policyholders, while stockholders, (who may or may not own policies) own stock insurance companies.

Reinsurance companies are insurance companies that sell policies to other insurance companies, allowing them to reduce their risks and protect themselves from very large losses. The reinsurance market is dominated by a few very large companies, with huge reserves.

Captive Insurance companies may be defined as limited purpose insurance companies established with the specific objective of financing risks emanating from their parent group or groups. This definition can sometimes be extended to include some of the risks of the parent company's customers. In short terms, it is an in-house self-insurance vehicle. Captives may take the form of a "pure" entity (which is a 100% subsidiary of the self-insured parent company); of a "mutual" captive (which insures the collective risks of industry members); and of an "association" captive (which self-insures individual risks of the members of a professional, commercial or industrial association). Captives represent commercial, economic and tax advantages to their sponsors due to the reductions on costs they help create, the ease for insurance risk management and the flexibility for cash flows they generate. Additionally, they may provide coverage of risks which are neither available nor offered in the traditional insurance market at reasonable prices.

Types of Insurance

Any risk that can be quantified probably has a type of insurance to protect it. Among the different types of insurance are:

* Automobile insurance, also known as auto insurance, car insurance and in the UK as motor insurance, is probably the most common form of insurance and may cover both legal liability claims against the driver and loss of or damage to the vehicle itself. Over most of the United States purchasing an auto insurance policy is required to legally operate a motor vehicle on public roads. Recommendations for which policy limits should be used are specified in a number of books. In some jurisdictions, bodily injury compensation for automobile accident victims has been changed to No Fault systems, which reduce or eliminate the ability to sue for compensation but provide automatic eligibility for benefits.
* Aviation insurance insures against Hull, Spares, Deductible, Hull War and Liability risks
* Boiler insurance (also known as Boiler and Machinery insurance or Equipment Breakdown Insurance)
* Casualty insurance insures against accidents, not necessarily tied to any specific property.
* Credit insurance pays some or all of a loan back when certain things happen to the borrower such as unemployment, disability, or death.
* Directors and Officers Insurance protects an organization (usually a corporation) from costs associated with litigation resulting from mistakes incurred by directors and officers for which they are liable. In the industry, it is usually called "D&O" for short.
* Financial loss insurance protects individuals and companies against various financial risks. For example, a business might purchase cover to protect it from loss of sales if a fire in a factory prevented it from carrying out its business for a time. Insurance might also cover failure of a creditor to pay money it owes to the insured. Fidelity bonds and surety bonds are included in this category.
* Health insurance policies will often cover the cost of private medical treatments if the NHS or other health organizations. It will often mean quicker health care where better facilities are available.
* Income protection insurance policies provide customers with financial support in the event of the policy holder being unable to work through illness or injury. It will provide monthly support to help pay of such financial commitment as mortgages and credit cards.
* Liability insurance covers legal claims against the insured. For example, a homeowner's insurance policy provides the insured with protection in the event of a claim brought by someone who slips and falls on the property, and brings a lawsuit for her injuries. Similarly, a doctor may purchase liability insurance to cover any legal claims against him if his negligence (carelessness) in treating a patient caused the patient injury and/or monetary harm. The protection offered by a liability insurance policy is two-fold: a legal defense in the event of a lawsuit commenced against the policyholder, plus indemnification (payment on behalf of the insured) with respect to a settlement or court verdict.
* Purchase insurance is aimed at providing protection on the products people purchase. Purchase insurance can cover individual purchase protection, warranties, guarantees, care plans and even mobile phone insurance.
* Life insurance provides a cash benefit to a decedent's family or other designated beneficiary, and may specifically provide for burial, funeral and other final expenses.
o Annuities provide a stream of payments and are generally classified as insurance because they are issued by insurance companies and regulated as insurance. Annuities and pensions that pay a benefit for life are sometimes regarded as insurance against the possibility that a retiree will outlive his or her financial resources. In that sense, they are the complement of life insurance.
* Total permanent disability insurance insurance provides benefits when a person is permanently disabled and can no longer work in their profession, often taken as an adjunct to life insurance.
* Locked Funds Insurance is a little known hybrid insurance policy jointly issued by governments and banks. It is used to protect public funds from tamper by unauthorised parties. In special cases, a government may authorise its use in protecting semi-private funds which are liable to tamper. Terms of this type of insurance are usually very strict. As such it is only used in extreme cases where maximum security of funds is required.
* Marine Insurance covers the loss or damage of goods at sea. Marine insurance typically compensates the owner of merchandise for losses sustained from fire, shipwreck, etc., but excludes losses that can be recovered from the carrier.
* Nuclear incident insurance — damages resulting from an incident involving radioactivive materials is generally arranged at the national level. (For the United States, see Price-Anderson Nuclear Industries Indemnity Act.)
* Environmental Liability Insurance protects the insured from bodily injury, property damage and cleanup costs as a result of the dispersal, release or escape of a pollutant.
* Pet Insurance insures pets against accidents and illnesses - some companies cover routine/wellness care and burial, as well.
* Political risk insurance can be taken out by businesses with operations in countries in which there is a risk that revolution or other political conditions will result in a loss.
* Professional Indemnity Insurance is normally a mandatory requirement for professional practitioners such as Architects, Lawyers, Doctors and Accountants to provide insurance cover against potential negligence claims. Non licensed professionals may also purchase malpractice insurance, it is commonly called Errors and Omissions Insurance and covers a service provider for claims made against them that arise out of the performance of specified professional services. For instance, a web site designer can obtain E&O insurance to cover them for certain claims made by third parties that arise out of negligent performance of web site development services.
* Property insurance provides protection against risks to property, such as fire, theft or weather damage. This includes specialized forms of insurance such as fire insurance, flood insurance, earthquake insurance, home insurance, inland marine insurance or boiler insurance.
* Terrorism insurance
* Title insurance provides a guarantee that title to real property is vested in the purchaser and/or mortgagee, free and clear of liens or encumbrances. It is usually issued in conjunction with a search of the public records done at the time of a real estate transaction.
* Travel insurance is an insurance cover taken by those who travel abroad, which covers certain losses such as medical expenses, lost of personal belongings, travel delay, personal liabilities.. etc.
* Workers' compensation insurance replaces all or part of a worker's wages lost and accompanying medical expense incurred due to a job-related injury.

A single policy may cover risks in one or more of the above categories. For example, car insurance would typically cover both property risk (covering the risk of theft or damage to the car) and liability risk (covering legal claims from say, causing an accident). A homeowner's insurance policy in the U.S. typically includes property insurance covering damage to the home and the owner's belongings, liability insurance covering certain legal claims against the owner, and even a small amount of health insurance for medical expenses of guests who are injured on the owner's property.

Potential sources of risk that may give rise to claims are known as "perils". Examples of perils might be fire, theft, earthquake, hurricane and many other potential risks. An insurance policy will set out in details which perils are covered by the policy and which are not.

Know history of Insurance

In some sense we can say that insurance appears simultaneously with appearance of human society. We know two types of economies in human societies: money ( with markets, money, financial instruments and so on )and non-money or natural economy ( without money, markets, financial instruments and so on ). The second type is more ancient form than the first. In such type of economy and such type of community we can see insurance in the form of helping each other. For example, when your house is fired down, the members of your community come and help you to build new one. The next time, when the same thing happens to your neighbour - you must to help. In other case - you will not get help in the future. This type of insurance survived till nowadays in some countries where modern money economy with its financial instruments are not so widespread ( for example countries on the territory of the former Soviet Union ).

And now we will speak about insurance in modern sense ( insurance in modern money economy, insurance as a part of the financial sphere). Early methods of transferring or distributing risk were practiced by Chinese and Babylonian traders as long ago as the 3rd and 2nd millennia BCE respectively. Chinese merchants traveling treacherous river rapids would redistribute their wares across many vessels to limit the loss due to any single vessel capsizing. The Babylonians developed a system which was recorded in the famous Code of Hammurabi, c. 1750 BC, and practiced by early Mediterranean sailing merchants. If a merchant received a loan to fund his shipment, he would pay the lender an additional sum in exchange for the lender's guarantee to cancel the loan should the shipment be stolen.

Achaemenian monarchs were the first to insure their people and made it official by registering the insuring process in governmental notary offices. The insurance tradition was performed each year in Norouz (beginning of the Iranian New Year); the heads of different ethnic groups as well as others willing to take part, presented gifts to the monarch. The most important gift was presented during a special ceremony and when a gift was worth more than 10,000 Derrik (Achaemenian gold coin weighing 8.35-8.42) the issue was registered in a special office. This was advantageous to those presented such special gifts. For others, the presents were fairly assessed by the confidants of the court. Then the assessment was registered in special offices.

The aim of registering was that whenever the one who presented the gift registered by the court was in trouble, the monarch and the court would help him or her. Jahez, a historian and writer, writes in one of his books on ancient Iran: "... and whenever the owner of the present is in trouble or wants to construct a building, set up a feast, have his children married, etc. the one in charge of this in the court would check the registration. If the registered amount exceeded 10,000 Derrik, he or she would receive an amount of twice as much."

A thousand years later, the inhabitants of Rhodes invented the concept of the 'general average'. Merchants whose goods were being shipped together would pay a proportionally divided premium which would be used to reimburse any merchant whose goods were jettisoned during storm or sinkage.

The Greeks and Romans introduced the origins of health and life insurance c. 600 AD when they organized guilds called "benevolent societies" which acted to care for the families and funeral expenses of members upon death. Guilds in the Middle Ages served a similar purpose. The Talmud deals with several aspects of insuring goods. Before insurance was established in the late 17th century, "friendly societies" existed in England, in which people donated amounts of money to a general sum that could be used in case of emergency.

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. These new insurance contracts allowed insurance to be separated from investment, a separation of roles that first proved useful in marine insurance. Insurance became far more sophisticated in post-Renaissance Europe, and specialized varieties developed.

Toward the end of the seventeenth century, the growing importance of London as a center for trade led to rising demand for marine insurance. In the late 1680s, Mr. Edward Lloyd opened a coffee house which became a popular haunt of ship owners, merchants, and ships’ captains, and thereby a reliable source of the latest shipping news. It became the meeting place for parties wishing to insure cargoes and ships, and those willing to underwrite such ventures. Today, Lloyd's of London remains the leading market for marine and other specialist types of insurance, but it works rather differently than the more familiar kinds of insurance.

Insurance as we know it today can be traced to the Great Fire of London, which in 1666 devoured 13,200 houses. In the aftermath of this disaster Nicholas Barbon opened an office to insure buildings. In 1680 he established England's first fire insurance company, "The Fire Office," to insure brick and frame homes.

The first insurance company in the United States provided fire insurance and was formed in Charles Town (modern-day Charleston), South Carolina, in 1732.

Benjamin Franklin helped to popularize and make standard the practice of insurance, particularly against fire in the form of perpetual insurance. In 1752, he founded the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire. Franklin's company was the first to make contributions toward fire prevention. Not only did his company warn against certain fire hazards, it refused to insure certain buildings where the risk of fire was too great, such as all wooden houses.

In the United States, regulation of the insurance industry is highly Balkanized, with primary responsibility assumed by individual State insurance departments. Whereas insurance markets have become centralized nationally and internationally, state insurance commissioners operate individually, though at times in concert through a national insurance commissioner's organization. In recent years, some have called for a federal regulatory system for insurance similar to that of the banking industry.

In the State of New York, which has unique laws in keeping with its stature as a global business center, Attorney General Eliot Spitzer has been in a unique position to grapple with major national insurance brokerages. Spitzer alleged that Marsh & McLennan steered business to insurance carriers based on the amount of contingent commissions that could be extracted from carriers, rather than basing decisions on whether carriers had the best deals for clients. Several of the largest commercial insurance brokerages have since stopped accepting contingent commissions and have adopted new business models.

Insurer’s Business Model

Insurers make money in two ways. Through underwriting, the process through which insurers select what risks to insure and decide how much premium to charge for accepting those risks and by investing the premiums they have collected from insureds.

The most difficult aspect of the insurance business is the underwriting of policies. Based on a wide assortment of data, insurers predict the likelihood that a claim will be made against their policies and price products accordingly.

Profit = Earned Premium + Investment Income - Incurred Loss - Underwriting Expenses

To this end, the industry uses actuarial science to quantify the risk they are willing to assume. Data is analyzed fairly accurately to project the rate of future claims based on a given risk. Actuarial science uses statistics and probability to analyze the risks associated with the range of perils covered, and these scientific principles are used to determine the insurers overall exposure. At the end of a given policy, the amount of premium collected minus the amount paid out in claims is the insurer's underwriting profit.

An insurer's underwriting performance is measured in their combined ratio. The loss ratio (incurred losses and loss-adjustment expenses divided by net earned premium) is added to the expense ratio (underwriting expenses divided by net premium written) to determine the company's combined ratio. The combined ratio is a reflection of the company's overall underwriting profitability. A combined ratio of less than 100 percent indicates profitability, while anything over 100 indicates a loss.

Insurance companies also earn investment profits on “float”. “Float” or available reserve is the amount of money, at-hand at any given moment, that an insurer has collected in insurance premium but has not been paid out in claims. Insurers start investing insurance premium as soon as it is collected and keeps earning interest on it until claims are paid out.

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 was $68.4 billion, at the result of float. Some insurance industry insiders, most notably Hank Greenberg, do not believe that it is forever possible to sustain a profit from float without an underwriting profit as well, but this opinion is not universally held. Naturally, 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.

Insurers currently make the most money from their auto insurance line of business. Generally better statistics are available on auto losses and underwriting on this line of business has benefited greatly from advances in computing. Additionally, property losses in the US, due to natural catastrophes, have perpetuated this trend.

What is Insurance

Insurance, in law and economics, is a form of risk management primarily used to hedge against the risk of potential financial loss. Insurance is defined as the equitable transfer of the risk of a potential loss, from one entity to another, in exchange for a premium and duty of care.

Principles of insurance

From the point of view of the insurance company there are four general criteria for deciding whether to insure events or not. 1. there must be a larger number of similar objects so the financial outcome of insuring the pool of exposures is predictable. Therefore they can calculate a "fair" premium. 2. the losses have to be accidental and unintentional from the point of view of the insured. 3. the losses must be measurable, identifiable in location, time, and be definite. They also want the losses to cause economic hardship. That is, so the insured has an incentive to protect and preserve the property to minimize the probabilty that the losses occur. 4. the loss potential to the insurer must be non-catastrophic. It cannot put the insurance company in financial jeopardy.

Losses must be uncertain.

The rate and distribution of losses must be predictable: To set premiums (prices) insurers must be able to estimate them accurately. This is done using the Law of Large Numbers which states that: The larger the number of homogenous exposures considered, the more closely the losses reported will equal the underlying probability of loss. If the coverage is unique, the insured will pay a correspondingly higher premium.