Insurance Industry | Private Insurance | public insurance

 

                      The Insurance Industry 

insurance-industry

Macroeconomic Functions of Insurance;           

                                                                           The functions of insurance in the economy are fundamentally two:

                                                                                     The insurance company itself and the financial.

             In its first aspect, insurance is a "branch of the economy whose purpose is the conservation of wealth" (Lashers), rebuilding industries, providing monetary sums to relatives of deceased persons or providing pensions to retirees, etc.

              The existence of insurance encourages private initiative, by allowing the development of economic activity with security guarantees.

                  Insurance also stimulates risk prevention, avoiding or alleviating the loss to the economy that the loss would produce.  

                    Along with this insurance function, the insurance industry has a second characteristic, typical of financial companies.

                    Since in the insurance sector premiums are collected at the beginning of the coverage of contracts, with the payment of claims occurring at a later time, financial surpluses or reserve funds are generated, which insurance companies invest in accordance with insurance legislation, in financial or material assets.  

                    Savings from insurance are called contractual savings, as to be made up of regular payments under a contract. Therefore, it assumes a continued desire to save with the advantages of stability, which allows the consolidation of financial markets (capital markets, money markets, mortgage loans, etc.) by generating long-term resources.

                   The contractual savings generated by the insurance are measured in terms quantitative due to the increase in technical provisions, mainly mathematical provisions of life insurance, and provisions for unearned premiums and pending claims in non-life insurance.

                   This fact produces the formation of important funds held by insurance companies, which when invested provide a financial performance, while generating wealth in other sectors economical.

                     The financial returns obtained from the investment of Technical reserves can thus be "discounted" from the premiums, by applying technical interest as an important factor in their calculation, or they can be assigned to the insured in the form of improved benefits.

                      The technical reserves of the insurance companies   must be invested in accordance with the legal provisions, fundamentally in securities –of the State or issued by industrial or commercial companies– with which the activity of other economic sectors is financed; as well as in real estate, loans, etc.

                In its financial aspect, insurance is, therefore, an element of stability or anti-inflationary, since it reduces consumption and stimulates savings;

                                                                   Savings that are invested in the long term, since, on the one hand, life insurance tends to have long durations and mathematical reserves are therefore invested in the long term. On the other hand, in other insurances, although the reserves of unearned premiums and pending claims remain for a short time in the insurance company, they are replaced by those of successive years due to the conservation of the portfolio and are increasing as a consequence Of its expansion. Hence, insurance companies also invest in these long-term lines, in real estate, securities, etc.   

 

Social Security and Private Insurance;            

                                                                      The social character of the insurance institution determines that in many countries there is a highly developed public insurance that tends to protect citizens against a good number of contingencies, such as illness, disability, retirement, etc. This is the so-called "welfare state", which offers basic protections to the entire population by covering certain risks, a system that is complemented by the institution of private insurance.

               The differences between public insurance - Social Security – and Private insurance refers both to the subjects that are covered, its purpose, management, and legal regulation. Let's see them below.

                 

Nature of the risks covered by both classes of insurance;              

                     Public insurance generally limits your coverage to the risks of personal nature and referring to basic levels of protection, while private insurance is simultaneously dedicated to covering personal, property, and property risks, either as a supplement to public insurance or with its own nature.

                  Private insurance, on the other hand, is designed and adapted to the personal needs of each insured, while the public cover the population in a generic way.

 

Determination of premiums;              

                                                     Social Security uses for the determination of premiums the budgetary system, also called distribution system, which consists of financing the system's budget each year with contributions from citizens.  

               There is no exact correlation between individuals exposed to risk or the risk they suffer and their contributions, since the system is financed through taxes and contributions from companies and workers. Nor is there any proportionality between the risk and the premium at the individual level, so that the risk classification is not made based on objective factors but with criteria of solidarity and income redistribution, based on factors unrelated to the risk itself.

                 On the other hand, in private insurance, premiums are calculated by the insurance entities in proportion to the probability of the risk occurring, through technical procedures.

 

Obligatory nature of public insurance;       

                                                                   All citizens who are within the conditions defined by the system are automatic beneficiaries of the system and are obliged to contribute in the amounts determined by legal provision.

                   The mandatory nature of the system is imposed by the fact that it does not there is proportionality between risk and premium, so that, if not Obligatory, public insurance would not be "contracted" by those who, due to having a higher income or for any other circumstance, have to pay a higher contribution than that corresponding to the risk to which they are exposed.

                        In certain systems, this general principle of obligation is tempered by the possibility of choosing between public insurance and an alternative private system as occurs in the pension system.

                   Private insurance, on the another hand is free and its contracting is governed by the principles of the market.

                   There are a variety of companies and coverages that can be or not contracted by people exposed to risk, although there is also an exception to this general principle, which occurs in the so-called mandatory private insurance.

                    The most typical example of This is the compulsory insurance of automobiles, which every vehicle owner must hire, since the public authorities deem this coverage necessary to protect other people and things that may be damaged as a result of traffic.

 

Determination of the benefits to be insured;       

                                                                        In public insurance, coverage is determined by factors objectives, uniformly defined for the insured population. Retirement benefits, for example, are determined based on the contribution bases of the last years of the active employee and their amount cannot be decreased or increased by the interested party. In some cases - such as the Self-Employed Workers Scheme - different levels of contributions and benefits can be chosen, but this always within some pre-established options.    

                On the contrary, in private insurance, the amount of benefits is free, although limited, by the objective value of the insured assets, in order to prevent the insurance from becoming a profitable operation. For the person exposed to risk. 

 

Insurance management;

                                          The management of public insurance is carried out, in general, by the Public Administration, while private insurance is managed by insurance entities subject to private law.

                   This general rule has, however, some exceptions, such as for example, the management of occupational accident insurance.

                        For their part, private insurance entities act under the    market principles and subject to operating standards established by commercial legislation. Their property is generally private, although it can also be public, although in this case they also act subject to common commercial legislation, in concurrence with those of private capital.

 

Legal regulation;

Legal-regulation

                    

 Private insurance is born and is formalized through a contract that establishes a civil and commercial relationship between the insurer and the person exposed to risk. For private insurance to be in force, it is necessary that there be a policy signed by the parties, from which rights and obligations arise. On the other hand, public insurance is not governed by commercial concepts but is regulated by legal provisions that in each case determine the benefits that the system will satisfy and the contributions that must be contributed to it.

 

The purpose of the insurance;                   

                                                               Public insurance pursues State purposes, related to the protection that it deems appropriate to offer citizens in case of need. On the other hand, private insurance pursues profit-making purposes for the insurer as a commercial activity that offers a service to the community in exchange for remuneration. Business profit is pursued in all insurance entities, both in those that, due to the form of a public limited company, seek to obtain benefits for their shareholders, as well as in insurance mutual or those called social welfare, that pursue results in favor of their partners, who are themselves insured or of the social work to which they contribute.

 

Insurance control;

                                  Public insurance is administered by State agencies, subject to a State Budget, and its internal control standards, and when the management of public insurance can be done by private bodies, they are supervised in their activity by the corresponding ministerial department.

                              Private insurance, on the another hand is subject to insurance legislation of the country, under the supervision of a control body - the General Directorate of Insurance under the Ministry of Economy - with powers inspectors.