unemployment insurance, insurance against loss of wages during the time that an able-bodied worker is involuntarily unemployed. The goal of such insurance is to provide a minimal livelihood to unemployed workers until they are once again employed. Compulsory unemployment insurance makes such protection legally obligatory for certain classes of workers under prescribed conditions. Voluntary unemployment insurance is maintained by private organizations sanctioned, encouraged, or subsidized by the state. The first attempts to establish unemployment insurance plans began toward the end of the 19th cent. in Germany, Italy, and Switzerland (see social security). Most Western European states adopted such plans in the early part of the 20th cent.: France, 1905; Great Britain, 1911; the Netherlands, 1916; Italy, 1919; and Germany, 1927. In the United States an unemployment insurance program, along with other welfare programs, was introduced by the Social Security Act of 1935. That act, amended many times, provides for a sliding scale of payroll taxes on industry. For example, employers whose records show that their business experiences little unemployment receive lower rates. The Employment and Training Administration in the U.S. Dept. of Labor is responsible for administering the law. Over the years Congress has extended the program to many workers initially not covered. By 1994 more than 96% of all workers were covered by unemployment insurance. Each state has its own unemployment insurance law and operates its own program.

no-fault insurance, type of indemnity plan, usually applied to automobile coverage, in which those injured in an accident receive direct payment from the company with which they themselves are insured. Originated (1947) in Saskatchewan, Canada, no-fault insurance eliminates the need for accident victims to establish another's liability, or fault, through a civil lawsuit. Lawyers' groups oppose no-fault, saying that it limits the citizen's right to sue. Supporters say that it leads to quicker settlement of accident claims and lower premium rates than the traditional tort liability system because it reduces legal fees and court costs. The first comprehensive no-fault plan in the United States was adopted (1971) in Massachusetts. Currently 13 states have no-fault auto insurance laws that in some way restrict the right of parties to file legal suits. Provisions defining when a person can sue in no-fault states vary, but motorists can generally sue for severe injuries. Recently, however, rising insurance costs have led some states to reexamine the effectiveness of no-fault insurance laws.

marine insurance: see insurance.

life insurance: see insurance.

insurance or assurance, device for indemnifying or guaranteeing an individual against loss. Reimbursement is made from a fund to which many individuals exposed to the same risk have contributed certain specified amounts, called premiums. Payment for an individual loss, divided among many, does not fall heavily upon the actual loser. The essence of the contract of insurance, called a policy, is mutuality. The major operations of an insurance company are underwriting, the determination of which risks the insurer can take on; and rate making, the decisions regarding necessary prices for such risks. The underwriter is responsible for guarding against adverse selection, wherein there is excessive coverage of high risk candidates in proportion to the coverage of low risk candidates. In preventing adverse selection, the underwriter must consider physical, psychological, and moral hazards in relation to applicants. Physical hazards include those dangers which surround the individual or property, jeopardizing the well-being of the insured. The amount of the premium is determined by the operation of the law of averages as calculated by actuaries. By investing premium payments in a wide range of revenue-producing projects, insurance companies have become major suppliers of capital, and they rank among the nation's largest institutional investors.

Common Types of Insurance

Life insurance, originally conceived to protect a man's family when his death left them without income, has developed into a variety of policy plans. In a "whole life" policy, fixed premiums are paid throughout the insured's lifetime; this accumulated amount, augmented by compound interest, is paid to a beneficiary in a lump sum upon the insured's death; the benefit is paid even if the insured had terminated the policy. Under "universal life," the insured can vary the amount and timing of the premiums; the funds compound to create the death benefit. With "variable life," the fixed premiums are invested in a portfolio (with earning reinvested), and the death benefit is based on the performance of the investment. In "term life," coverage is for a specified time period (e.g., 5-10 years); such plans do not build up value during the term. Annuity policies, which pay the insured a yearly income after a certain age, have also been developed. In the 1990s, life insurance companies began to allow early payouts to terminally ill patients.

Fire insurance usually includes damage from lightning; other insurance against the elements includes hail, tornado, flood, and drought. Complete automobile insurance includes not only insurance against fire and theft but also compensation for damage to the car and for personal injury to the victim of an accident (liability insurance); many car owners, however, carry only partial insurance. In many states liability insurance is compulsory, and a number of states have instituted so-called no-fault insurance plans, whereby automobile accident victims receive compensation without having to initiate a liability lawsuit, except in special cases. Bonding, or fidelity insurance, is designed to protect an employer against dishonesty or default on the part of an employee. Title insurance is aimed at protecting purchasers of real estate from loss by reason of defective title. Credit insurance safeguards businesses against loss from the failure of customers to meet their obligations. Marine insurance protects shipping companies against the loss of a ship or its cargo, as well as many other items, and so-called inland marine insurance covers a vast miscellany of items, including tourist baggage, express and parcel-post packages, truck cargoes, goods in transit, and even bridges and tunnels. In recent years, the insurance industry has broadened to guard against almost any conceivable risk; companies like Lloyd's will insure a dancer's legs, a pianist's fingers, or an outdoor event against loss from rain on a specified day.

See also health insurance; social welfare; workers' compensation.

The History of Insurance

The roots of insurance might be traced to Babylonia, where traders were encouraged to assume the risks of the caravan trade through loans that were repaid (with interest) only after the goods had arrived safely—a practice resembling bottomry and given legal force in the Code of Hammurabi (c.2100 B.C.). The Phoenicians and the Greeks applied a similar system to their seaborne commerce. The Romans used burial clubs as a form of life insurance, providing funeral expenses for members and later payments to the survivors.

With the growth of towns and trade in Europe, the medieval guilds undertook to protect their members from loss by fire and shipwreck, to ransom them from captivity by pirates, and to provide decent burial and support in sickness and poverty. By the middle of the 14th cent., as evidenced by the earliest known insurance contract (Genoa, 1347), marine insurance was practically universal among the maritime nations of Europe. In London, Lloyd's Coffee House (1688) was a place where merchants, shipowners, and underwriters met to transact business. By the end of the 18th cent. Lloyd's had progressed into one of the first modern insurance companies. In 1693 the astronomer Edmond Halley constructed the first mortality table, based on the statistical laws of mortality and compound interest. The table, corrected (1756) by Joseph Dodson, made it possible to scale the premium rate to age; previously the rate had been the same for all ages.

Insurance developed rapidly with the growth of British commerce in the 17th and 18th cent. Prior to the formation of corporations devoted solely to the business of writing insurance, policies were signed by a number of individuals, each of whom wrote his name and the amount of risk he was assuming underneath the insurance proposal, hence the term underwriter. The first stock companies to engage in insurance were chartered in England in 1720, and in 1735, the first insurance company in the American colonies was founded at Charleston, S.C. Fire insurance corporations were formed in New York City (1787) and in Philadelphia (1794). The Presbyterian Synod of Philadelphia sponsored (1759) the first life insurance corporation in America, for the benefit of Presbyterian ministers and their dependents. After 1840, with the decline of religious prejudice against the practice, life insurance entered a boom period. In the 1830s the practice of classifying risks was begun.

The New York fire of 1835 called attention to the need for adequate reserves to meet unexpectedly large losses; Massachusetts was the first state to require companies by law (1837) to maintain such reserves. The great Chicago fire (1871) emphasized the costly nature of fires in structurally dense modern cities. Reinsurance, whereby losses are distributed among many companies, was devised to meet such situations and is now common in other lines of insurance. The Workmen's Compensation Act of 1897 in Britain required employers to insure their employees against industrial accidents. Public liability insurance, fostered by legislation, made its appearance in the 1880s; it attained major importance with the advent of the automobile.

In the 19th cent. many friendly or benefit societies were founded to insure the life and health of their members, and many fraternal orders were created to provide low-cost, members-only insurance. Fraternal orders continue to provide insurance coverage, as do most labor organizations. Many employers sponsor group insurance policies for their employees; such policies generally include not only life insurance, but sickness and accident benefits and old-age pensions, and the employees usually contribute a certain percentage of the premium.

Since the late 19th cent. there has been a growing tendency for the state to enter the field of insurance, especially with respect to safeguarding workers against sickness and disability, either temporary or permanent, destitute old age, and unemployment (see social security). The U.S. government has also experimented with various types of crop insurance, a landmark in this field being the Federal Crop Insurance Act of 1938. In World War II the government provided life insurance for members of the armed forces; since then it has provided other forms of insurance such as pensions for veterans and for government employees.

After 1944 the supervision and regulation of insurance companies, previously an exclusive responsibility of the states, became subject to regulation by Congress under the interstate commerce clause of the U.S. Constitution. Until the 1950s, most insurance companies in the United States were restricted to providing only one type of insurance, but then legislation was passed to permit fire and casualty companies to underwrite several classes of insurance. Many firms have since expanded, many mergers have occurred, and multiple-line companies now dominate the field. In 1999, Congress repealed banking laws that had prohibited commercial banks from being in the insurance business; this measure was expected to result in expansion by major banks into the insurance arena.

In recent years insurance premiums (particularly for liability policies) have increased rapidly, leaving unprecedented numbers of Americans uninsured. Many blame the insurance conglomerates, contending that U.S. citizens are paying for bad risks made by the companies. Insurance companies place the burden of guilt on law firms and their clients, who they say have brought unreasonably large civil suits to court, a trend that has become so common in the United States that legislation has been proposed to limit lawsuit awards. Catastrophic earthquakes, hurricanes, and wildfires in late 1980s and the 90s have also strained many insurance company's reserves.

health insurance, prepayment plan providing services or cash indemnities for medical care needed in times of illness or disability. It is effected by voluntary plans, either commercial or nonprofit, or by compulsory national insurance plans, usually connected with a social security program.

Health Insurance Worldwide

Compulsory accident and sickness insurance was initiated (1883-84) in Germany by Otto von Bismarck; it was adopted by Great Britain, France, Chile, the Soviet Union, and other nations after World War I. In Britain the National Health Insurance Act of 1946, which went into effect in 1948, provided the most comprehensive compulsory medical care plan introduced anywhere up to that time. Under the plan the individual obtained free medical attention from any doctor participating in the national health service. The cost was met by the national government and local taxation; a small charge for some services has been instituted since then. In 1958 the Canadian Hospital and Diagnoses Act provided full hospital service almost free of charge in public wards; more comprehensive coverage was added in 1967. The program is financed by the federal government but administered by the provinces. National health insurance has been widely adopted in Europe and parts of Asia. The United States is the only Western industrial nation without some form of comprehensive national health insurance.

Health Insurance in the United States

In the past, health insurance in the United States took the form of voluntary programs. Such programs date from about 1850, when health insurance was provided chiefly by cooperative mutual benefit and fraternal beneficiary associations. Limited coverage by commercial companies was also introduced during that period, and subsequently many plans were established by industries and labor unions.

Advocacy of government health insurance in the United States began in the early 1900s. Theodore Roosevelt made national health insurance one of the major planks of the Progressive party during the 1912 presidential campaign, and in 1915 a model bill for health insurance was presented, but defeated, in numerous state legislatures. After 1920 opposition to government-sponsored plans was led by the American Medical Association and was said to be motivated by the fear that government participation in medical care might lead to socialized medicine.

Over the years in the United States, many plans have been set up by societies of practicing physicians, but the largest enrollment has been in Blue Cross and Blue Shield plans. These were set up as community-sponsored, nonprofit service plans based on contracts with hospitals and with subscribers. Most general voluntary plans accept subscribers, in groups or as individuals. These plans extend coverage to dependents and exclude accidents and diseases covered by workers' compensation laws. Although valuable in cushioning the financial distress caused by illness or injury, voluntary health insurance not only limits benefits in order to avoid prohibitive rates but excludes many people, particularly the poor, who cannot afford it, and senior citizens, for whom the cost is often prohibitive. By the mid-1990s many of the Blue Cross companies, which had been suffering financially, were reorganizing, and by 2002 more than 20% of Blue Cross members were covered by plans that had converted to for-profit status.

During the middle of the 20th cent. it became apparent that legislation was necessary to provide medical care for the elderly. A voluntary federal-state grant-in-aid program providing medical care to the elderly was first implemented in 1961. Legislation proposed by President Kennedy to provide medical care for the aged through the social security mechanism was defeated in 1961, but in 1965, during President Lyndon B. Johnson's administration, Federal legislation in the form of Medicare for the aged and Medicaid for the indigent was enacted. Since 1966, both public and private health insurance has played a key role in financing health-care costs in the United States.

Over 70% of all medical bills are now covered by government programs and insurance, and the number of people covered by some form of health insurance increased from about 12 million in 1940 to over 225 million in 1996. About 38 million Americans were enrolled in Medicare, and there were more than 36 million Medicaid recipients. In that same year, about 187 million people were covered by private health insurance. However, more than 44 million Americans are not covered by any health insurance, and those who are have seen significant cost increases. As premiums increased from $16.8 billion in 1970 to $310 billion in 1995, and national health-care costs rose from $75 billion in 1970 to just over $1 trillion in 1996, many businesses increased the amount of money employees contribute toward their health insurance. This situation has led to continuing political pressure for restructuring of the national health-care insurance system.

Congress debated many bills for a national health insurance plan in the 1960s and 70s, and in 1973 it passed the Health Maintenance Organization (HMO) Act, which provided grants to employers who set up HMOs (see health maintenance organization). Unlike insurers, HMOs provide care directly to patients; HMOs were viewed as low-cost alternatives to hospitals and private doctors. In 1997 approximately 651 HMOs provided care to 66.8 million people.

In the 1980s and 90s political leaders again advanced a variety of national health insurance proposals. One plan backed by leading Democrats was known as "pay or play" because it would have forced employers to provide health insurance or pay into a national fund that would cover uninsured workers. A second, advanced by President G. H. W. Bush in 1992, would have provided tax breaks, vouchers, and other incentives to employers to extend health insurance benefits. A third proposal, based on the Canadian model and nationalized health care, was opposed by most doctors and the insurance industry.

In 1993, President Clinton, who had been elected on a promise of health-care reform, proposed a national health insurance program that would have ultimately provided coverage for most citizens, but opposition by insurance, medical, small-business, and other groups killed it. In 1999, Clinton and Congress battled over developing a "patient's bill of rights," to protect people from denial of service and other HMO limitations. Many individual states have developed their own health insurance alternatives by using managed-health-care systems that monitor the type of services offered and have set fees for each service, by expanding Medicaid to help serve formerly ineligible patients, and by establishing statewide or small-business health insurance alliances that pool people into a large group that has more buying power.

group insurance: see insurance.

fire insurance: see insurance.

Federal Deposit Insurance Corporation (FDIC), an independent U.S. federal executive agency designed to promote public confidence in banks and to provide insurance coverage for bank deposits up to $100,000. The corporation was established in 1933 to prevent a repetition of the losses incurred during the Great Depression when bankrupt banks could not return the money deposited in them. It is managed by a five-member board of directors, appointed by the president with the consent of the U.S. Senate. The FDIC provides coverage for deposits in national banks, in state banks that are members of the Federal Reserve System, and in other qualified state banks. (Mutual funds and other securities are not covered.) It may also make loans to insured banks in the interest of protecting the depositors. The corporation derives its income from assessments on insured banks and interest on government securities. Since 1989 the FDIC has supervised the Savings Association Insurance Fund, the agency that was created to provide coverage for savings and loan associations when the Federal Savings and Loan Insurance Corporation became insolvent. A sharp increase in bank failures in the late 1980s and early 1990s led to the insolvency (1991-92) of the FDIC as well, forcing it to seek government loans. The fund recovered by the mid-1990s.

Form of social insurance designed to compensate workers for short-term, involuntary unemployment. It was created primarily to provide financial assistance to laid-off workers during a period deemed long enough to allow them to find another job or to be rehired at their original job. In most countries, workers who are permanently disabled or who have been unemployed for a long period of time are covered under other plans. In countries such as Canada and Britain, workers in any occupation may qualify for unemployment insurance; the U.S. denies coverage to certain workers, such as government employees and the self-employed. In most countries, benefits are related to earnings and are paid for a limited period of time. Funding may come out of general government revenues or from specific taxes placed on employers or employees.

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Compulsory public-insurance program that protects against various economic risks (e.g., loss of income due to sickness, old age, or unemployment). Social insurance is considered one type of social security, though the two terms are sometimes used interchangeably. The first compulsory national social-insurance programs were established in Germany under Otto von Bismarck: health insurance in 1883, workers' compensation in 1884, and old-age and disability pensions in 1889. Austria and Hungary soon followed Germany's example. After 1920, social insurance was rapidly adopted throughout Europe and the Western Hemisphere. The U.S. lagged behind until the passage of the Social Security Act in 1935. Social Security in the U.S. now provides retirement benefits, health care for persons over a specific minimum age, and disability insurance. Social-insurance contributions are normally compulsory and may be made by the insured person's employer and the state as well as by the individual. Social insurance is usually self-financing, with contributions being placed in specific funds for that purpose. Seealso unemployment insurance; welfare.

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Method by which large groups of individuals equalize the burden of financial loss from death by distributing funds to the beneficiaries of those who die. Life insurance is most developed in wealthy countries, where it has become a major channel of saving and investing. There are three basic types of life-insurance contract. Term insurance is issued for a specified number of years; protection expires at the end of the period and there is no cash value remaining. Whole-life contracts run for the whole of the insured's life and also accumulate a cash value, which is paid when the contract matures or is surrendered; the cash value is less than the policy's face value. Endowment contracts run for a specified time period and pay their full face value at the end of the period.

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Insurance against claims of loss or damage for which a policyholder might have to compensate another party. The policy covers losses resulting from acts or omissions that are legally deemed to be negligent and that result in damage to the person, property, or legitimate interests of others. It was principally the introduction of the automobile that spurred the rapid growth of this form of insurance, which now extends to a great many activities in addition to driving, including malpractice insurance for doctors and other professionals, marine liability for boat owners and operators, and product liability for manufacturers of consumer goods. Seealso casualty insurance, consumer protection.

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Contract that, by redistributing risk among a large number of people, reduces losses from accidents incurred by an individual. In return for a specified payment (premium), the insurer undertakes to pay the insured or his beneficiary a specified amount of money in the event that the insured suffers loss through the occurrence of an event covered by the insurance contract (policy). By pooling both the financial contributions and the risks of a large number of policyholders, the insurer is able to absorb losses much more easily than is the uninsured individual. Insurers may offer insurance to any individual able to pay, or they may contract with members of a group (e.g., employees of a firm) to offer special rates for group insurance. Marine insurance, covering ships and voyages, is the oldest form of insurance; it originated in ancient times with loans to shipowners that were repayable only on safe completion of a voyage, and it was formalized in medieval Europe. Fire insurance arose in the 17th century, and other forms of property insurance became common with the spread of industrialization in the 19th century. It is now possible to insure almost any kind of property, including homes, businesses, motor vehicles, and goods in transit. Seealso casualty insurance; health insurance; liability insurance; life insurance.

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System for the advance financing of medical expenses through contributions or taxes paid into a common fund to pay for all or part of health services specified in an insurance policy or law. The key elements are advance payment of premiums or taxes, pooling of funds, and eligibility for benefits on the basis of contributions or employment without an income or assets test. Health insurance may apply to a limited or comprehensive range of medical services and may provide for full or partial payment of the costs of specific services. Benefits may consist of the right to certain medical services or reimbursement of the insured for specified medical costs. Private health insurance is organized and administered by an insurance company or other private agency; public health insurance is run by the government (see social insurance). Both forms of health insurance are to be distinguished from socialized medicine and government medical-care programs, in which doctors are employed directly or indirectly by the goverment, which also owns the health-care facilities (e.g., Britain's National Health Service). Seealso insurance.

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Provision against loss to persons and property, covering legal hazards as well as those of accident and sickness. Major classes include liability, theft, aviation, workers' compensation, credit, and h1. Liability insurance contracts may cover liability arising from use of an automobile, operation of a business, professional negligence (malpractice insurance), or property ownership. Credit insurance may cover the risk of bad debts from insolvency, death, and disability, the risk of loss of savings from bank failure, and the risk of loss of export credit due to commercial or political changes.

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Independent U.S. government corporation created to insure bank deposits against loss in the event of a bank failure and to regulate certain banking practices. Established after the bank holiday in early 1933, the FDIC was intended to restore public confidence in the system. It insures bank deposits in eligible banks up to $100,000 for each deposit. All members of the Federal Reserve System are required to insure their deposits with the FDIC, and almost all commercial banks in the U.S. choose to do so.

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