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111-614: Citizens Property Insurance Corporation (Citizens) was created in 2002 from the merger of two other entities to provide both windstorm coverage and general property insurance for home-owners who could not obtain insurance elsewhere. It was established by the Florida Legislature in Chapter 627.351(6) Florida Statutes as a not-for-profit insurer of last resort, headquartered in Tallahassee, Florida , and quickly became
222-684: 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
333-416: 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 the insurance policy is called the premium . If the insured experiences a loss which is potentially covered by the insurance policy,
444-592: 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
555-770: A $ 1.5 billion disparity, prompting the governor to order Citizens to reduce its risk. Barry Gilway was hired on June 18, 2012, as president and chief executive officer of Citizens Property Insurance Corporation, replacing Tom Grady. With 42 years of experience in the insurance industry, he has a reputation as a turnaround specialist. He was keenly aware that his first priority was to shrink the number of Citizens policies. Throughout 2012, Citizens asked 174,000 of its nearly 1.4 million policyholders to move their policies to five private insurers. Approximately 25,000 of that group chose to remain with Citizens, but Florida's consumer insurance advocate Robin Smith Westcott warned that, "For
666-467: A $ 110,000 donation to the re-election campaign of Governor Scott. A spokesman for the governor stated that the Citizens deal was not influenced by the governor. State leaders criticized the deal as " corporate welfare for a politically connected startup". Former Chief Financial Officer of Florida Alex Sink criticized the transaction, noting that Florida law limited the incentive to $ 100 per policy. She
777-458: 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
888-448: 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
999-420: A combination of the two. Under a quota share arrangement, a fixed percentage (say 75%) of each insurance policy is reinsured. Under a surplus share arrangement, the ceding company decides on a "retention limit": say $ 100,000. The ceding company retains the full amount of each risk, up to a maximum of $ 100,000 per policy or per risk, and the excess over this retention limit is reinsured. The ceding company may seek
1110-601: 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
1221-455: 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.,
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#17327905209861332-514: A deal in which Heritage Property and Casualty Insurance, formed in 2012, was offered $ 52 million to take over 60,000 accounts ($ 867 per policy). Florida CFO Jeff Atwater admitted that Heritage did not have the financial strength to take over the policies without the incentive, but Citizen's President Barry Gilway insisted that Heritage was "one of the most well-capitalized" in Florida. In March 2013, while negotiations were in progress, Heritage made
1443-421: A facultative agreement coincides with the term of the policy. Facultative reinsurance is usually purchased by the insurance underwriter who underwrote the original insurance policy, whereas treaty reinsurance is typically purchased by an outwards reinsurance manager, or other senior executive at the insurance company. The reinsurer's liability will usually cover the whole lifetime of the original insurance, once it
1554-532: A given national market should be approximately equal to the square-root of the number of primary insurers active in the same market. Econometric analysis has provided empirical support for the Powers-Shubik rule. Ceding companies often choose their reinsurers with great care as they are exchanging insurance risk for credit risk. Risk managers monitor reinsurers' financial ratings ( S&P , A.M. Best , etc.) and aggregated exposures regularly. Because of
1665-711: A major hurricane, and rate hikes during those years increased revenue from premiums. As of 2019, Citizen's policy count had dropped to 419,000 but rose again due to a number of issues. Some companies stopped writing policies in high-claim South Florida, refused to renew where roof age exceeded 10 years or the home was built prior to Hurricane Andrew , before Hurricane-proof building codes were adopted. Since April 2021, four insurers were closed as insolvent. One of those, Avatar Property & Casualty, had 37,000 former customers looking for an insurer. Unfortunately for 2,000 of them, they had pending claims against Avatar, and most companies have underwriting guidelines that prohibit writing
1776-413: 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
1887-453: 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
1998-447: A more balanced and homogeneous portfolio of insured risks. This would make its results more predictable on a net basis (i.e. allowing for the reinsurance). This is usually one of the objectives of reinsurance arrangements for the insurance companies. Under proportional reinsurance, one or more reinsurers take a stated percentage share of each policy that an insurer issues ("writes"). The reinsurer will then receive that stated percentage of
2109-412: A multinational company, to cover property and liability risks in many countries around the world. In such situations, the insurance company may find a local insurance company which is authorised in the relevant country, arrange for the local insurer to issue an insurance policy covering the risks in that country, and enter into a reinsurance contract with the local insurer to transfer the risks to itself. In
2220-403: A new policy for a property with an open claim. Lexington Insurance Company announced that they will discontinue home insurance, sending another 8,000 property owners to search for a new insurer. Lexington specialized in homes worth $ 1+ million and Citizens will only insure property values less than $ 700,000, so Citizens was not an option. Citizen's Policies numbered 807,910 on March 25, 2022. When
2331-540: A new state law that allows the policies from private companies to cost 20% more than Citizen's rates. Florida House Bill 837, passed March 24, 2023, was intended to reduce the number and cost of insurance lawsuits in Florida. That issue was one of the reasons cited by insurance companies leaving Florida according to the Insurance Commissioner Michael Yaworsky. In August 2023 FOIR announced that Mainsail Insurance Company from Texas
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#17327905209862442-469: A once in 100-year storm. Many firms in past years purchased less, and if claims exceeded reinsurance and reserves, they were taken over by the state, who paid off remaining claims. Those owners suffered no penalty for failing to act in an ethical manner. As the 2013 season started, pressure on insurers to lower rates was high because reinsurance costs had fallen by 15% since 2012, which also had lower costs. Claim expenses were down thanks to seven years without
2553-669: A position paper in 2010 entitled, "Into the Storm: Framing Florida's Looming Property Insurance Crisis" . Chief among problems identified was that Citizens Insurance was undercapitalized and charges "rates that are not actuarially sound". The study also found that low-risk property owners were subsidizing high risk policies. They concluded that rates must be based on risk factors, including "geographical location, age of structure, and construction type". Florida House Bill 1495, passed in 2009, allows Citizens to raise rates gradually over five years to become actuarially sound. This
2664-631: 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,
2775-432: A quota share arrangement for several reasons. First, it may not have sufficient capital to prudently retain all of the business that it can sell. For example, it may only be able to offer a total of $ 100 million in coverage, but by reinsuring 75% of it, it can sell four times as much, and retain some of the profits on the additional business via the ceding commission. The ceding company may seek surplus reinsurance to limit
2886-697: 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
2997-556: 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
3108-399: 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,
3219-534: A substitute for Catastrophe XLs. In catastrophe excess of loss, the cedent's retention is usually a multiple of the underlying policy limits, and the reinsurance contract usually contains a two risk warranty (i.e. they are designed to protect the cedent against catastrophic events that involve more than one policy, usually very many policies). For example, an insurance company issues homeowners' policies with limits of up to $ 500,000 and then buys catastrophe reinsurance of $ 22,000,000 in excess of $ 3,000,000. In that case,
3330-652: A total loss up to $ 1 million, and purchases a layer of reinsurance of $ 4 million in excess of this $ 1 million. If a loss of $ 3 million were then to occur, the insurer would bear $ 1 million of the loss and would recover $ 2 million from its reinsurer. In this example, the insurer also retains any loss over $ 5 million unless it has purchased a further excess layer of reinsurance. The main forms of non-proportional reinsurance are excess of loss and stop loss . Excess of loss reinsurance can have three forms - " Per Risk XL" (Working XL), "Per Occurrence or Per Event XL" ( Catastrophe or Cat XL), and " Aggregate XL". In per risk ,
3441-649: 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
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3552-572: 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
3663-447: Is assumed by a private firm. On February 8, 2013, Senator Jeff Brandes filed Florida Senate Bill 724, a comprehensive bill to overhaul Florida property insurance law to avoid new "hurricane taxes" which would be necessary if another catastrophic hurricane ravaged the state. The proposal is unpopular among many Citizens customers because it would mandate more rate increases to what they consider to be already high premiums. A similar bill
3774-437: Is common for insurers and reinsurers to have long-term relationships that span many years. Reinsurance treaties are typically longer documents than facultative certificates, containing many of their own terms that are distinct from the terms of the direct insurance policies that they reinsure. However, even most reinsurance treaties are relatively short documents considering the number and variety of risks and lines of business that
3885-460: Is in addition to a 0.7% for 2022, a 1.3% assessment from July 1 2022 to June 30 2023, and another 0.7% ending December 31 2023. As of April 7, 2023 Citizen's policies numbered 1,248,000. Citizens Insurance Board of Governors submitted a 14.2% rate increase on March 31, 2023 effective in November. However, Florida statutes limit rate increases on homesteaded property to 12% per year. In August 2023,
3996-444: Is likely to reduce the amount of capital needed to provide coverage. The risks are spread, with the reinsurer or reinsurers bearing some of the loss incurred by the insurance company. The income smoothing arises because the losses of the cedent are limited. This fosters stability in claim payouts and caps indemnification costs. Proportional Treaties (or "pro-rata" treaties) provide the cedent with "surplus relief"; surplus relief being
4107-409: 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,
4218-426: 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
4329-421: Is to reduce their exposure to loss by passing part of the risk of loss to a reinsurer or a group of reinsurers. With reinsurance, the insurer can issue policies with higher limits than would otherwise be allowed, thus being able to take on more risk because some of that risk is now transferred to the re-insurer. Reinsurance can make an insurance company's results more predictable by absorbing large losses. This
4440-413: Is written. However the question arises of when either party can choose to cease the reinsurance in respect of future new business. Reinsurance treaties can either be written on a "continuous" or "term" basis. A continuous contract has no predetermined end date, but generally either party can give 90 days notice to cancel or amend the treaty for new business. A term agreement has a built-in expiration date. It
4551-636: The Florida Legislature passed legislation to merge the Florida Residential Property and Casualty Joint Underwriting Association (FRPCJUA) and the Florida Windstorm Underwriting Association (FWUA). This resulted in the creation of Citizens Property Insurance Corporation (Citizens), whose goal is to more efficiently and effectively provide insurance to, and serve the needs of, home-owners in high-risk areas and others who cannot find coverage in
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4662-492: The Florida Office of Insurance Regulation (FOIR) approved rate increases for commercial customers an average of 9.2% while rejecting the residential rate proposals that averaged 12% because they were based on " overall actuarial soundness, instead of individual actuarial soundness". Despite new state regulations that required homeowners with Citizen's Insurance to also purchase Federal Flood Insurance , June 2023 saw
4773-551: The Glitch Bill , was signed into law by Governor Crist on June 11, 2007. This legislation permitted agents to write a Citizens policy for customers if the premium for a comparable policy offered by a private carrier was 15% (instead of 25%) more expensive. Customers were also allowed to stay with Citizens Insurance if they were notified that their policy was being assigned to a private carrier. After 2010, eight global insurance carriers, including State Farm, entered or re-entered
4884-680: 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
4995-742: 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
5106-617: 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
5217-427: The reinsurer (1 line each). The maximum automatic underwriting capacity of the cedent would be $ 1,000,000 in this example. Any policy larger than this would require facultative reinsurance. Under non-proportional reinsurance the reinsurer only pays out if the total claim(s) suffered by the insurer exceed a stated amount, which is called the "retention" or "priority". For instance the insurer may be prepared to accept
5328-514: The Florida Office of Insurance Regulation to avoid competing with private carriers. Insurance agents were prohibited from writing policies through Citizens if there was a private (not surplus lines) carrier that would write the risk. If a qualified insurance company was willing to take a group of policies, Citizens Insurance would transfer them to that company and cancel coverage. Customers had no recourse. Florida Senate Bill 2498, known as
5439-613: The Florida market. While the cost of reinsurance fell by 10% in 2010 and was expected to decrease more in 2011, the cost of insurance to consumers remained the same. In 2010, State Farm and Renaissance jointly formed DaVinci Reinsurance Ltd. in Bermuda , which covered more than 3.5 million Florida homes in 2010. That same year, Japan-based Tokio Millennium Re Ltd. became an approved Florida reinsurance vendor. As of 2011, Citizens had cash and investment totaling $ 11.3 billion and 1.3 million policyholders. The Florida Council of 100 published
5550-836: The OIR, "State regulators have approved six property insurers to remove up to 151,000 policies from state-run Citizens Property Insurance Corp. in February [2014]. [...] Florida's Office of Insurance Regulation last month approved First Community Insurance Co. to take out as many as 51,249 Citizens policies, while Safepoint Insurance Co. may remove up to 40,000 policies. Elements Property Insurance Co. and Heritage Property Casualty Insurance Co. each have been approved for up to 20,000 policies. Southern Fidelity Insurance Co. and Southern Fidelity Property & Casualty can remove 10,000 each. Private insurers have taken out more than 312,000 Citizens policies this year. [Citizens] President Barry Gilway has said
5661-562: The above examples concern reinsurance contracts (treaty contracts) that cover more than one policy. Reinsurance can also be purchased on a per policy basis, in which case it is known as facultative reinsurance . Facultative reinsurance can be written on either a proportional or excess of loss basis. Facultative reinsurance contracts are commonly memorialized in relatively brief contracts known as facultative certificates and often are used for large or unusual risks that do not fit within standard reinsurance treaties due to their exclusions. The term of
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#17327905209865772-410: The capacity to write more business and/or at larger limits. The insurance company may be motivated by arbitrage in purchasing reinsurance coverage at a lower rate than they charge the insured for the underlying risk, whatever the class of insurance. In general, the reinsurer may be able to cover the risk at a lower premium than the insurer because: The insurance company may want to avail itself of
5883-508: The cedent's gross premium income during a 12-month period, with limit and deductible expressed as percentages and amounts. Such covers are then known as " stop loss " contracts. A basis under which reinsurance is provided for claims arising from policies commencing during the period to which the reinsurance relates. The insurer knows there is coverage during the whole policy period even if claims are only discovered or made later on. All claims from cedent underlying policies incepting during
5994-449: The cedent's insurance policy limits are greater than the reinsurance retention. For example, an insurance company might insure commercial property risks with policy limits up to $ 10 million, and then buy per risk reinsurance of $ 5 million in excess of $ 5 million. In this case a loss of $ 6 million on that policy will result in the recovery of $ 1 million from the reinsurer. These contracts usually contain event limits to prevent their misuse as
6105-508: The ceding company's capital requirements, or for tax mitigation or other purposes. The reinsurer may be either a specialist reinsurance company, which only undertakes reinsurance business, or another insurance company. Insurance companies that accept reinsurance refer to the business as " assumed reinsurance ". There are two basic methods of reinsurance: There are two main types of treaty reinsurance, 'proportional and non-proportional, which are detailed below. Under proportional reinsurance,
6216-455: The company did have $ 500 billion in exposure, storms would have to damage or destroy every Citizens-insured home in all 67 Florida counties. A "century storm", with a 1% chance of occurring in any year, would generate no more than $ 21 billion in claims. Regarding the resources available to pay claims, the Citizen's own website states that their "Claims‐Paying Ability" is $ 19.5 billion. There is
6327-609: The company was projected to insure 15% of the market by end of 2022. From early 2022 to the first quarter of 2023, seven Florida insurers had been declared insolvent including United Property & Casualty Insurance (UPC) with 135,000 policies. Their policies were concentrated in Southwest Florida and experienced 25,000 claims with losses of $ 864 million from Hurricane Ian. The Florida Insurance Guaranty Association board met on March 31 and filed for an emergency assessment of 1% on all Florida property insurance policies. That
6438-401: The consumer, there really isn't enough information." The state determined that those five private insurers were financially sound and able to absorb more customers, but issues such as higher premiums, customer responsiveness and number of consumer complaints must be determined by the policyholder. Florida law gives the consumer 30 days from notification to decline their policy transfer before it
6549-446: 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
6660-791: 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
6771-437: The event of a loss, the policyholder would claim against the local insurer under the local insurance policy, the local insurer would pay the claim and would claim reimbursement under the reinsurance contract. Such an arrangement is called "fronting". Fronting is also sometimes used where an insurance buyer requires its insurers to have a certain financial strength rating and the prospective insurer does not satisfy that requirement:
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#17327905209866882-695: 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
6993-478: The expertise of a reinsurer , or the reinsurer's ability to set an appropriate premium, in regard to a specific (specialised) risk. The reinsurer will also wish to apply this expertise to the underwriting in order to protect their own interests. This is especially the case in Facultative Reinsurance. By choosing a particular type of reinsurance method, the insurance company may be able to create
7104-706: 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
7215-472: 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
7326-419: 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
7437-410: 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 the insured has an insurable interest established by ownership, possession, or pre-existing relationship. The insured receives
7548-496: The goal is to trim Citizens down to about 800,000 policies." As of April 2014, Citizen policies fell below one million, to 940,000. Cash reserves totaled $ 7.6 billion, a record. Since the 2005 pull back by insurance giants Allstate, State Farm, etc., small, in-state companies have been taking a larger share of policies. These start-ups have not followed the traditional insurance model by accumulating cash reserves to cover expenses in high claim years. Instead, they pay as much as half of
7659-447: 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
7770-518: The insurance company would only recover from reinsurers in the event of multiple policy losses in one event (e.g., hurricane, earthquake, flood). Aggregate XL affords a frequency protection to the reinsured. For instance if the company retains $ 1 million net any one vessel, $ 5 million annual aggregate limit in excess of $ 5m annual aggregate deductible, the cover would equate to 5 total losses (or more partial losses) in excess of 5 total losses (or more partial losses). Aggregate covers can also be linked to
7881-774: 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
7992-420: 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 the risks, especially if
8103-401: The insurer of last resort, but the insurer of only resort for many Floridians. As of 2005, Florida owed almost $ 5 billion, which would be recovered through insurance policy assessments. The cost of insurance and its availability became an important "hot button" issue in Florida, especially in the 2006 elections . Through 2006, Citizens Insurance charged its customers the highest rate approved by
8214-409: 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
8325-653: The insurers of last resort. The Florida Hurricane Catastrophe Fund was also created and managed by the state as a resource for Florida consumers and insurers. It is funded by assessments to every property insurance policy in the state. Hurricane damage between 1992 and 2003 was relatively manageable, with none or one major hurricane each year except 1998 (which had two). During that time, new insurance companies were started and existing carriers began writing policies again. By 1999, Florida Insurance Commissioner Bill Nelson stated that FRPCJUA and FWUA were close to shifting most of their 711,000 policies to private insurers. In 2002,
8436-542: 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
8547-720: The largest insurer in the state. The company has no connection to Louisiana Citizens Property Insurance Corporation , the equivalent entity in Louisiana , or several similarly named "for-profit" subsidiaries in the Hanover Insurance Group . Hurricane Andrew in 1992 was the costliest storm the United States had experienced, with $ 26.5 billion in damage. It took a huge bite out of the reserves for claims held by 30 insurance companies doing business in Florida. Eleven insurance companies were bankrupted, while others stopped writing or renewing property insurance policies in
8658-620: 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
8769-524: The legislature adjourned in May 2013. In an effort to encourage more private companies to acquire homeowners policies serviced by Citizens (known as takeout policies), the Florida Office of Insurance Regulation (FOIR) was authorized to provide monetary incentives based on the number of Citizens policies acquired. In May 2013, just three of the eight members of the Citizens Board of Governors approved
8880-443: 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,
8991-410: The losses it might incur from a small number of large claims as a result of random fluctuations in experience. In a 9 line surplus treaty the reinsurer would then accept up to $ 900,000 (9 lines). So if the insurance company issues a policy for $ 100,000, they would keep all of the premiums and losses from that policy. If they issue a $ 200,000 policy, they would give (cede) half of the premiums and losses to
9102-612: 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
9213-472: The number of Citizen’s policies balloon past 1.3 million. Two private companies agreed to accept 26,000 Citizens policies in spring 2023. Citizens Insurance is expected to continue depopulating policies until they reach an acceptable number. Florida Governor Ron DeSantis admitted that Citizen's Insurance was not solvent: "If you did have a major, major hurricane hit with a lot of Citizens property holders it would not have enough to pay out." DeSantis also signed
9324-440: The open, private insurance market. There were four major storms in 2004 that made landfall in Florida, with total damages exceeding $ 57 billion. The following year brought five major storms, including Katrina , the most expensive Atlantic hurricane of all time. Once again, several companies pulled out of the Florida market due to an extraordinary number of hurricane and new sinkhole related claims. Citizens became not just
9435-474: The other companies subscribing to the contract are called following reinsurers. Alternatively, one reinsurer can accept the whole of the reinsurance and then retrocede it (pass it on in a further reinsurance arrangement) to other companies. Using game-theoretic modeling, Professors Michael R. Powers ( Temple University ) and Martin Shubik ( Yale University ) have argued that the number of active reinsurers in
9546-418: The period of the reinsurance contract are covered even if they occur after the expiration date of the reinsurance contract. Any claims from cedent underlying policies incepting outside the period of the reinsurance contract are not covered even if they occur during the period of the reinsurance contract. A Reinsurance treaty under which all claims occurring during the period of the contract, irrespective of when
9657-461: The policy premium for reinsurance to offshore companies to cover claims. In the seven years since the last major Florida hurricane, profits have risen, but many small companies shifted that money into affiliated businesses and ignored the need for a reserve. Insurance rates were based on the company making a reasonable profit after expenses, which included funding a reserve. The OIR suggests that insurance companies have reserves and reinsurance to cover
9768-414: 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
9879-406: 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
9990-417: The premiums and will pay the stated percentage of claims. In addition, the reinsurer will allow a "ceding commission " to the insurer to cover the costs incurred by the ceding insurer (mainly acquisition and administration, as well as the expected profit that the cedent is giving up). The arrangement may be "quota share" or "surplus reinsurance" (also known as surplus of line or variable quota share treaty) or
10101-448: 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
10212-478: The prospective insurer may be able to persuade another insurer, with the requisite credit rating, to provide the coverage to the insurance buyer, and to take out reinsurance in respect of the risk. An insurer which acts as a "fronting insurer" receives a fronting fee for this service to cover administration and the potential default of the reinsurer. The fronting insurer is taking a risk in such transactions, because it has an obligation to pay its insurance claims even if
10323-404: 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
10434-679: The regular Florida legislative session ended in March 2022, the Florida Senate had passed a bill to limit “free roof” claims and similar lawsuits, but the Florida House did not. Demotech is the company that issues financial stability ratings for 50 Florida-based insurers. On March 23, 2022 the top five executives from Demotech sent a letter to Florida's Governor plus the Senator and House leadership entreating them to pass reforms before
10545-406: The reinsurance policy is referred to as the "ceding company" or "cedent". The company issuing the reinsurance policy is referred to as the "reinsurer". In the classic case, reinsurance allows insurance companies to remain solvent after major claims events, such as major disasters like hurricanes or wildfires. In addition to its basic role in risk management , reinsurance is sometimes used to reduce
10656-403: The reinsurer becomes insolvent and fails to reimburse the claims. Many reinsurance placements are not placed with a single reinsurer but are shared between a number of reinsurers. For example, a $ 30,000,000 excess of $ 20,000,000 layer may be shared by 30 or more reinsurers. The reinsurer who sets the terms (premium and contract conditions) for the reinsurance contract is called the lead reinsurer;
10767-439: The reinsurer's share of the risk is defined for each separate policy, while under non-proportional reinsurance the reinsurer's liability is based on the aggregate claims incurred by the ceding office. In the past 30 years there has been a major shift from proportional to non-proportional reinsurance in the property and casualty fields. Almost all insurance companies have a reinsurance program. The ultimate goal of that program
10878-419: 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 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
10989-456: 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
11100-650: The start of Atlantic hurricane season June 1. Failure to do so would cause Demotech to downgrade the financial stability ratings for "a number" of Florida insurers. Sen. Jeff Brandes and other authorities have warned that collapsing companies would cause massive growth of Citizens Property Insurance Corp, a huge bailout from the Florida Hurricane Catastrophe Fund and threaten the thriving real estate market. Following Hurricane Ian in October, Citizen's policy count exceeded 1.1 million and
11211-695: The state. Those that remained raised premiums and deductibles across the board and limited the number of high-risk policies they wrote. Almost 1 million coastal homeowners were unable to find any company willing to insure their homes, so the Florida Legislature authorized the formation of the Florida Residential Property and Casualty Joint Underwriting Association (FRPCJUA) and the Florida Windstorm Underwriting Association (FWUA) as
11322-455: The telephone with settlement authority at a mandatory settlement-conference when requested by a judge. Reinsurance Reinsurance is insurance that an insurance company purchases from another insurance company to insulate itself (at least in part) from the risk of a major claims event. With reinsurance, the company passes on ("cedes") some part of its own insurance liabilities to the other insurance company. The company that purchases
11433-536: The treaties reinsure and the dollars involved in the transactions. They rely heavily on industry practice. There are not "standard" reinsurance contracts. However, many reinsurance contracts do include some commonly used provisions and provisions imbued with considerable industry common and practice. Sometimes insurance companies wish to offer insurance in jurisdictions where they are not licensed, or where it considers that local regulations are too onerous: for example, an insurer may wish to offer an insurance programme to
11544-441: The underlying policies incepted, are covered. Any losses occurring after the contract expiration date are not covered. As opposed to claims-made or risks attaching contracts. Insurance coverage is provided for losses occurring in the defined period. This is the usual basis of cover for short tail business. A policy which covers all claims reported to an insurer within the policy period irrespective of when they occurred. Most of
11655-452: 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,
11766-485: 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
11877-611: Was also concerned that Heritage's reinsurance may not contain full risk transfer. New insurance companies in Florida must be approved by the Office of Insurance Regulation (OIR), which reviews the firm's business plan, projections and financial condition. The judgment of the OIR has been questioned because six of the 18 companies licensed to write "takeout" policies between 2007 and 2011 failed, even though Florida had no major hurricanes during that time frame. Florida taxpayers were forced to cover $ 400 million in losses. Despite concerns about
11988-438: Was approved to operate in Florida. They also disclosed that 280,000 of Citizen's policies were approved for assumption by several insurers by October 2023. Insurance 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
12099-496: Was defeated in 2012. However, businessman, and former US Representative Tom Feeney commented, "It is unfair to continue to require 77 percent of Florida homeowners to subsidize Citizens policies, in addition to 100 percent of businesses, charities, religious institutions, renters, automobile policyholders, local governments and school boards." The bill did not make it out of the Senate Banking and Insurance Committee before
12210-492: 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
12321-529: Was intended to shift the risk from taxpayers to the private sector. In the spring of 2012, Florida Governor Rick Scott stated in a survey with the Florida Council of 100 that Citizens Insurance had $ 504.8 billion in risk and just $ 6.1 billion in cash reserves. PolitiFact Florida, a fact checker of the Tampa Bay Times and Miami Herald , researched Scott's claims. They concluded that while
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