So, what is insurance?
A team of researchers led by Orice Williams, a director at the U.S. Government Accountability Office, has prepared a report to help members of the U.S. House Financial Services Committee wrestle with that question as they draft financial services reform bills.
The researchers spent 12 months analyzing the definition of insurance by poring over documents from academic journals, accounting boards, industry associations, federal securities regulators, state insurance regulations and the National Association of Insurance Commissioners, Kansas City, Mo.
Distinguishing between insurance and noninsurance products – such as genuine finite reinsurance contracts and contracts that simply transfer financial risk – can be important in areas such as tax accounting and preparing corporate financial reports, Williams writes.
“We found there is no single, universal definition of insurance,” Williams writes. “However, we identified certain key elements of risk transfer or risk spreading that were common among the varying definitions.”
Williams says elements commonly included in definitions of insurance include indemnification; the ability to make reasonable estimates of future losses; the ability to expresses losses in definite monetary amounts; and the possibility of adverse, random events occurring outside the control of the insured.
Moreover, state insurance regulators use the Uniform Product Coding Matrices developed by the NAIC as a guide to identifying the products that are treated as insurance products, Williams writes.
But Williams notes that states differ about whether some products, such as medical prepayment plans and fixed annuities with limited payment periods, really are insurance products.
In addition, some products, such as accident insurance products that provide death and health care benefits, might cross the boundaries separating various types of insurance. That means that laws or regulations setting different rules for different types of insurance could cause problems for the sellers and buyers of the boundary-crossing products, Williams writes.
Williams also writes about the challenges of making sure that finite reinsurance contracts really do transfer insurance risk and do not simply transfer financial risk.
A copy of the report is on the Web at Document Link