Page 416 - Encyclopedia of Business and Finance

eobf_I 7/5/06 3:04 PM Page 393

Insurance

keep members apprised of how their colleagues in other damage to property, and injury caused to others. The per-
industries and organizations are handling key issues. In son or organization seeking to transfer risk—the insured
addition, members can join Internet-based groups that (policyholder) pays a relatively small amount (the pre-
enable them to network and exchange information on- mium) to an insurance company (the insurer), which
line dealing with their particular industry or special inter- issues an insurance policy in which the insurer agrees to
ests. reimburse the insured for any losses covered by the policy.
The IMA requires certified members to obtain a cer- Insurers are able to provide coverage for virtually any pre-
tain number of Continuing Professional Education cred- dictable loss.
its every year. It offers a number of methods to achieve
this objective, including an annual conference, EARLY HISTORY
chapter/council education programs, Regional Education The concept of insurance was introduced thousands of
Assistance Programs, self-study courses (including online
years ago and has evolved over many centuries. The Chi-
offerings), a monthly video-subscription program, and
nese, for example, divided their cargoes among many
national seminars. It also offers in-house education pro- boats to reduce the severity of loss from the perils of the
grams for companies, focusing on current trends, indus- seas, while the biblical story of Joseph and the famine in
try-specific developments, and continuing skills Egypt illustrates the storing of grain during the seven
enhancement.
good years to relieve shortages during the seven years of
The IMA is governed by a volunteer president, exec- famine. Marine insurance emerged in London when ships
utive committee, and board of directors. A salaried, full- sailed for the New World. Fire insurance arose from the
time executive director directs the day-to-day operations great fire of London in 1666, in which 14,000 buildings
of the Institute based on policy guidelines promulgated by were destroyed. In 1752 Benjamin Franklin (1706–1790)
the executive committee and board of directors. Activities founded the first mutual fire insurance company in the
also are conducted by approximately three hundred local United States, the Philadelphia Contributorship for the
chapters and twenty-four regional councils, which hold Insurance of Houses from Loss by Fire.
regular technical meetings and other functions. The IMA’s
headquarters is located at 10 Paragon Drive, Montvale,
New Jersey, 07645-1718, (201) 474-1600; www.imanet. U.S. INSURANCE INDUSTRY
org; www.strategicfinancemag.com. The U.S. insurance industry is made up of approximately
5,000 companies that provide insurance coverage of vari-
SEE ALSO Accounting; Certified Management Accountant ous types, with combined annual revenue of about $1 tril-
(CMA)/Certified in Financial Management (CFM) lion. The industry is highly concentrated with the fifty
largest companies holding more than 60 percent of the
market. Within product segments, concentration is even
Kathy Williams
Robert F. Randall higher.
The three broad categories of insurance are property
and casualty, which generates about 60 percent of annual
industry revenue; health, generating about 12 percent;
INSURANCE and life, which generates 10 percent. Within the property
Insurance is vital to a free enterprise economy. Insurance and casualty segment, commercial insurance accounts for
is the process of spreading risk of economic loss among as 60 percent of revenue. Because of the very different insur-
many people or entities as possible who are subject to the ance issues involved in each, many agencies handle only
same kind of risk; it is based on the laws of probability one type of insurance. Agencies may also specialize in sell-
(chance of a given outcome happening) and large num- ing to individuals, businesses, or groups.
bers (which enables the laws of probability to work). Soci- Insurance is sold either directly by insurers (direct
ety faces many perils (causes of loss)—some natural (e.g., insurers) or through the independent agency system,
earthquakes, hurricanes, tornados, flood, drought), some exclusive agencies, and brokers. There are about 130,000
human (e.g., arson, theft, fraud, vandalism, contamina- insurance agency offices, with the largest insurance agen-
tion, pollution, terrorism), and some economic (e.g., cies holding only 20 percent of the total market. The
expropriation, inflation, obsolescence, depressions/reces- industry is highly fragmented.
sions). An insurance agent works on the insurance com-
Availability of insurance allows individuals and busi- pany’s behalf, while an insurance broker represents the
nesses to purchase policies that provide protection from customer’s interests. Many agencies, especially on the
financial loss attributable to death, accidents, sicknesses, commercial side, function as brokers.

ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION 393