What is the name of the contract between an insurance company and an individual?

Abstract

The agricultural insurance system has taken various changes in India during the last five decades. Lack of location specific insurance contracts, modest awareness, absence of transparency, and delay in settling claims are being cited as key obstacles in large-scale/widespread acceptance of agricultural/crop insurance by the famers. In order to boost the adoption of the insurance products, the insurance system has gone through various phases and was revised from a very general insurance corporation to the village level weather index insurance (WII). The chapter deals with the development of suitable insurance product to the farmers as per the local weather conditions. The crops covered for the WII were rice, cotton and chillies for addressing the flood and low temperatures and livestock forage option for dryland of Andhra Pradesh, India. The premia calculated for rice, cotton and chilli crops were Rs.1,937, Rs.2,807 and Rs.2,565 per ha respectively with a uniform assured sum of Rs.25,000 per ha. Similarly, the insurance premium calculated for livestock forage was Rs.1,875 per ha with assured sum of Rs.12,500 per ha. Phase-wise term-sheets would be beneficial for the risk management to overcome prolonged dry spells. The timely pay-out to the farmers also created interest on WII. The study suggests that the present insurance program named Pradhan Mantri Fasal Bima Yojana (PMFBY) can take up such relevant products through the revised weather based crop insurance scheme and develop awareness among the farmers to upscale the adoption. It is further recommended that the agricultural insurance company of India should continuously monitor for timely settlement of claims to improve the adaptation of the weather insurance products by the farmers.

2.2 Insurance component of the 1982 legislation

The system that was created due to the 1982 legislation, often referred to as “CATNAT”, addresses the requirement for all insurance contracts to cover loss due to natural disasters in policies that cover against damage to property and business interruption. According to this legislation, “direct damage to property as a result of abnormal intensity of a natural agent is considered as the effect of natural disasters, when standard measures in place to prevent damage were unable to prevent it, or were not taken”. To be eligible for this cover, policyholders were required to pay a supplemental premium, of which the rate was defined by decree for each type of contract taken out (currently at 12% for buildings and 6% for vehicles). As such, the system is based on national solidarity (extension of compulsory insurance, supplemental premium and identical excess amounts for everyone).

The measures resulting from this Act may have undergone several changes since their implementation, but they have never been called into question. Nevertheless, in recent years, the main criticism of the system has revolved around its failure to encourage preventive measures. With its uniform rate of excess independent of the level of exposure to risk of insured properties, it is unanimously agreed that the system operates in an irresponsible way.

A Bill “reforming compensation schemes of natural disasters” was put forward by the Government in April 2012. Since then, the review of the Bill has remained at a standstill. To encourage risk prevention, it put forward the possibility of varying premiums paid by policyholders to guarantee coverage of the effects of natural disasters. However, this variation was only aimed at two categories of policyholder, those that, according to the Government, “possess tools required in order to improve risk prevention: local government and businesses above a certain size”.

For many experts, significant efforts made over the past 30 years in France relating to knowledge of flood risk affecting the whole country, overseas territories included, means that flood risk now falls within the scope of insurability. This view may still be the subject of technical debates, but the issue is without doubt primarily a political one. What Government would dare to question a view that, today, is perceived as a social standard?

Introduction

Crop insurance is a contractual agreement between a farmer and an insurer under which the farmer pays a premium to the insurer and the insurer agrees to make insurance payments contingent on events occurring in the future that trigger losses as defined in the crop insurance contract. Crop insurance payments are intended to reduce risk by making payments when a farm is under financial stress. Under better than average outcomes, a farmer pays a premium but does not receive a payment, so the intended net effect of insurance is to reduce the range of possible outcomes that farmers can experience.

Most insurance markets are regulated to assure that insurance companies can make the insurance payments stipulated in insurance contracts. Conceivably, this regulatory function could be the only governmental involvement in crop insurance. In the United States, however, the federal government is much more heavily involved in crop insurance. The federal government determines the specifications of federal crop insurance contracts that are sold to farmers, sets premiums that farmers pay on crop insurance policies, subsidizes the costs of premiums and program delivery, and acts as a reinsurer to crop insurance companies offering crop insurance contracts. It is thus important to understand the role of the federal government in crop insurance markets and how crop insurance differs from other more common forms of insurance. Although each country is unique, many countries are involved in crop insurance and face many of the same issues as in the United States, as noted in the final section of this article.

In the materials that follow, features of the crop insurance market are delineated first by types of crop insurance products available to farmers. Then the history of the involvement of government in crop insurance is discussed, with particular emphasis given to increases in subsidies that have occurred through time. Finally, major issues that have caused difficulties and concerns in crop insurance delivery are outlined and described, along with implications for performance of crop insurance.

5.3.1 Amicable acquisition and expropriation of severely exposed assets

Amicable acquisition is based on consent of the owner and constitutes a prioritized, face-track route. However, according to article L.561-3 of the French Environmental Code, it is only available for goods covered by a “comprehensive home insurance contract” that includes cover against the effects of natural disasters. It concerns goods exposed to a major natural risk or damaged by a natural disaster. It is a preventive measure that comes into force when human lives are at risk. Its objective is to enable people residing in areas particularly exposed to torrential floods or rapid flooding to resettle, whilst also ensuring safe and sustainable neutralization of vacated areas. Amiable acquisition of property affected by a natural disaster is also a possibility. Here, the property must have suffered damage affecting more than 50% of its value and be compensated under the CatNat system. Finally, once land exposed to natural risk has been acquired, it must be declared as unsuitable for construction within a period of three years31.

Expropriation is an innovation in terms of natural risk prevention since the law favors the use of expropriation in areas threatened by certain major natural risks that pose a serious threat to human lives. Expropriation is used in extreme cases, where amicable acquisition is impossible.

In order for expropriation to occur, the risk must be stated in a PPRI. In addition, the use of expropriation must be less expensive than other means of safeguarding and protection, such as works or surveillance or warning measures32. The development of a PPRI does not constitute an alternative procedure to expropriation, but rather a complementary measure. Finally, regardless of the initiator or the beneficiary, only the State can initiate the procedure and declare the public easement. Through this procedure, people living in particularly vulnerable areas are able to resettle and vacated areas are neutralized in a safe and sustainable way. This process violates the rules of Common law in as much as the existence of risk is not taken into account when compensation amounts are determined.

Noncompliance and farm SLM practice assessment procedure

If a farmer is assessed not to have followed the suggested practices as per the contract, a predetermined amount could be deducted from his insurance payment as a penalty. Farm audits can be conducted for assessing farmer's compliance to the adoption of SLM practices as directed under insurance contract. Drawing from similar setups in the United Kingdom, a farm audit would identify and define key objectives of sustainable agricultural practices (Measures, n.d.). Primary indicators can then be selected for each criterion which can be measured and graded accordingly. Subsequently, farmers can be issued a voucher with their respective grades based on compliance to either processes adhered to or outcomes of the suggested farming system and practices. In the initial years, however, observed characteristics method (based on SLM processed adhered to) would be more suitable as SLM outcomes may not be visible in a short span of time. Despite the site-specific and individual nature of sustainable agriculture, several general practices and principles can be identified to help farmers select appropriate management practices (Table 13.2).

Table 13.2. Illustrative sustainable land management (SLM) Practices Based on Observed Characteristics Method (Processes Adhered to) for Compliance Audit.

ImprovementSLM practicesBenefitAssessment unitImprovement in agroecologyNo tillageReduced costs, improved resilience, stable yield, risk mitigationFarm levelMulticropping/intercroppingFarm levelAgroforestryFarm levelSelection of suitable varietiesFarm levelFarm infrastructureWatershed development/ditch improvementsFarm levelPostharvest infrastructureCommunity level

Authors' own design.

An insurance fund that could invest in loss prevention

In France, protection measures are funded by the Barnier Fund mechanism (FPRNM, Fonds de Prévention des Risques Naturels Majeurs). The mechanism was created by Law n°95-101 on February 2, 1995. It is funded by a 12% levy on the 12% premium linked to the compulsory extended natural catastrophe coverage on all property and car damage insurance contracts (Law 82-600 on July 13, 1982). The Barnier Fund is funded by taxpayers. Initially, it was created to pay for the expropriation cost of assets that were in high-risk areas (e.g., floodplains) and to finance other measures of risk reduction, primarily gray infrastructure. This fund is dedicated to reducing vulnerability of assets (local communities and homeowners) exposed to natural hazards. It is used for different risk reduction measures, such as structural protective measures, amiable land acquisition, and targeted communication to raise risk awareness. Implementation of physical measures (works) make up 50% of the funding.

The distribution of the funding allowed by the Barnier Fund are: 70% dedicated to dike rings, 20% toward engineering works aiming to slow down water flows, and 10% for adaptive measures. These allocations have been relatively stable over the past decade. It cannot, however, be used for maintenance or reconstruction, which would limit its use for NBS such as wetland or river restoration. Also, the fund is monospecific, which means that it will preferentially fund a prevention project that is dedicated to a single hazard risk reduction. It may be challenging to use the fund for NBS implementation due to the multifunctional nature of NBS to simultaneously address multiple hazards.

Fee-for-service

Perhaps the most traditional and straightforward method for reimbursement is the fee-for-service method. In this methodology, the healthcare provider is given a specific payment for each patient visit and service. If the patient has contracted to be covered for that particular type of visit or service, then the provider can make a claim for reimbursement from the insurer for providing that service. This type of reimbursement would be similar to that a homeowner would receive for a plumbing repair if this repair was covered by the home insurance contract. Because the health insurance company (the payer) will reimburse a healthcare professional (provider) after each service has been rendered, the reimbursement is called a retrospective payment. A patient with no coverage for that service would pay for that service out of his/her own pocket. This direct payment is often called self-pay.

The only difference between self-pay and retrospective payment is the entity from which the provider receives reimbursement. In either case, no charge will incur until the provider has delivered the service. Both options give patients substantial freedom to decide on when and where to receive healthcare services. However, retrospective payment has the risk that the cost remains unknown before services are rendered, so the patient or insurer may have to pay more than might have been expected. This is of particular concern when introducing a novel expensive technology. An insurer that is providing retrospective payment may not know in advance how many patients will undergo the treatment or how much the treatment will cost; this might result in a large unplanned expense for the insurer. Insurers may be reluctant to take on such risks until other evidence is available to support the cost-effectiveness of the novel expensive treatment. Alternatively, they may cap the costs of the service or identify a standard payment for each type of service, in order to control their financial risks.

Provision of Health-Care Services

Traditionally, PHI programs – in the United States and elsewhere – do not influence incentives on the supply side, for example, remuneration systems for physicians. One important exception is the development of managed care insurance in the United States (Glied, 2000; Barnes et al., 2014; Fang and Rizzo, 2009; Lewis et al., 2013; Ehlert and Oberschachtsiek, 2014). However, managed care has been developed because third-party payers (employers, government) put pressure on PHI programs to contain health spending. Managed care is virtually nonexistent in individual PHI programs in the United States. In general, PHI programs instead use instruments at the demand side to influence costs. Insurance contracts include mechanisms such as co-payments and deductibles to increase consumers' cost-consciousness. These mechanisms in turn are supposed to put indirect pressure on the behavior of providers.

Moreover, PHI programs usually are unable to influence the supply of health-care providers. The market power of PHI programs in most cases is too small to play an active role in determining the supply of health-care providers. Moreover, policy makers (at least in most of Europe and in Canada) are first of all interested in the viability of public schemes (Stabile and Thomson, 2014; Thomson et al., 2009). Thus, they want to cut expenditures and growth rates of expenditures primarily within these systems. Cost containment in PHI programs is of secondary importance to them. Therefore, we often observe that the attempt to contain costs in the public sector leads to cost shifting toward PHI programs. It is very common that health-care providers compensate for budgets, spending cuts, and the like in the public sector by raising volume and/or prices for services in PHI programs. Governments may even purposefully shift costs from public schemes to PHI programs by allowing higher fee levels in PHI programs to compensate providers for cost-containment measures in the public sector.

10.2 Insurance Links to Foreign Insurance Companies

Insurance companies that pay for damages caused by earthquakes in Japan are those with business licenses in Japan. Thus, it may appear that insurance payment is closed within the country of Japan. However, for insurance companies to assure payment to corporations and individuals, the involvement of foreign insurance companies is needed. In general, insurance companies operate with the law of large numbers [1] in estimating insurance coverage payment. Here the law of large numbers applies when each insurance event has a probability that is independent.

The law, however, does not apply to damage caused by natural disasters such as earthquakes, typhoons, or flooding. Assume, for example, two separate buildings, one in Iwate Prefecture and the other in Fukushima Prefecture, having the same insurance company covering the buildings, each at 10 million JPY. If the insurance only covers fires, simultaneous coverage payments for both buildings are very unlikely. A fire at the building in Iwate Prefecture does not cause damage to the building in Fukushima Prefecture.

In contrast, for making a coverage payment in the case of earthquake damage, if the buildings in Iwate and Fukushima Prefectures were damaged by the same earthquake, the insurance company has to make the payment at the same time for the two buildings. That is, for an insurance that covers only damage against fire, the maximum coverage payment at a time is 10 million JPY, whereas if it covered the risk against earthquakes, the maximum coverage payment at one time may sum up to 20 million JPY.

In this example with only two buildings, the possible maximum coverage payment was twice, but in reality, the insurance company has to estimate the maximum coverage payment for damage from an earthquake as the sum of all buildings it covers in the area that can be affected by a single earthquake. For an insurance company, the risk from natural disasters like earthquake, typhoon, or flooding can accumulate the direct claims paid; this is called accumulation risk.

Reinsurance [2] is one way of stabilizing the operations of insurance companies by moderating the effect of total coverage payment due to natural disasters. Fig. 10.1 shows the mechanism of reinsurance. Reinsurance is a mechanism for insurance companies to transfer partial or entire risks to other insurance companies.

The insurance company that covers the risk of the insured is called the direct insurance company, the contract between the insurance company and the insured is the direct insurance contract, the payment the insured makes to the insurance company is the direct premium, and the payment the direct insurance company makes to the insured is the direct claims paid. The insurance company that covers the risk of the direct insurance company, other than the direct insurance company itself, is called the reinsurance company, the contract between the original insurance company and the reinsurance company is the reinsurance contract, the payment the direct insurance company makes to the reinsurance company is the reinsurance premium, and the payment the reinsurance company makes to the original insurance company is the reinsurance claims paid [2]. Outsourcing the risk with reinsurance is called cession, and covering another insurance company's risk with reinsurance is called acceptance of reinsurance. What takes place is, by ceding the risk of the insured from the natural disasters of earthquakes, typhoons and flooding, the direct insurance company can stabilize its operations by reducing the total net claims paid (direct claims paid less the reinsurance claims) upon damage by natural disasters.

Note here that the risk of natural disasters is an accumulation risk. Here we will discuss an automobile accident coverage for driver X. Assume a domestic insurance company A had a liability insurance agreement with the driver. Say the direct insurance coverage was 10 billion JPY and if A thought the coverage was too high, A would cede part of X's insurance risk to another domestic insurance company B. The insurance company B rarely has any other insurance contracts to cover when X has an automobile accident, and B will freely judge the portion of the coverage of 10 billion JPY it wants to accept with reinsurance.

The situation is different, however, if the direct insurance is own vehicle insurance covering property damage to X's top-of-the-line sports car. Say the own vehicle coverage was 300 million JPY, and even if A thought it was too expensive, A cannot cede the risk to B. The reason for this is that B has many other own vehicle insurance contracts and with a single hit of a typhoon, B would have to make a number of direct claims payments at the same time it covers the own vehicle coverage of X's top-of-the-line sports car. In other words, B cannot base its judgment of whether to reinsure the case on the 300 million JPY coverage.

In countering accumulation risks, entering reinsurance agreements with other insurance companies with operations in regionally nearby areas is difficult. Therefore, reinsurance companies that reinsure risks of natural disasters in Japan in practice are limited to insurance companies overseas. When we, therefore, discuss the natural disaster of the Great East Japan Earthquake and insurance, we naturally have to talk about reinsurance as well.

Which is a contract between an individual and an insurance company?

What is the contract between an insurer and a customer called?

What type of contract is an insurance contact?

Is the contract between insurance company and the policyholder?