Auto Insurance

Auto insurance

Vehicle insurance

Auto insurance protects you against financial loss if you have an accident. It is a contract between you and the insurance company. You agree to pay the premium and the insurance company agrees to pay your losses as defined in your policy. Auto insurance provides property, liability and medical coverage:

Property coverage pays for damage to or theft of your car.
Liability coverage pays for your legal responsibility to others for bodily injury or property damage.
Medical coverage pays for the cost of treating injuries, rehabilitation and sometimes lost wages and funeral expenses.

An auto insurance policy comprises six kinds of coverage. Most countries require you to buy some, but not all, of these coverages. If you're financing a car, your lender may also have licy and to pay your premium.requirements. Most auto policies are for six months to a year.
In the United States, your insurance company should notify you by mail when it’s time to renew the po

Auto insurance in the United States

Auto insurance in the United States

Coverage available

The consumer may be protected with different coverage types depending on what coverage the insured purchases. Some states require that motorists carry liability insurance coverage to ensure that their drivers can cover the cost of damages to people or property in the event of an automobile accident. Some states, such as Wisconsin, have more flexible “proof of financial responsibility” requirements.

In the United States, liability insurance covers claims against the policy holder and generally, any other operator of the insured vehicles, provided they do not live at the same address as the policy holder, and are not specifically excluded on the policy. In the case of those living at the same address, they must specifically be covered on the policy. Thus it is necessary, for example, when a family member comes of driving age they must be added to the policy. Liability insurance sometimes does not protect the policy holder if they operate any vehicles other than their own. When you drive a vehicle owned by another party, you are covered under that party’s policy. Non-owners policies may be offered that would cover an insured on any vehicle they drive. This coverage is available only to those who do not own their own vehicle and is sometimes required by the government for drivers who have previously been found at fault in an accident. Non-owners policies are also known as Named Operator Policies. The policies are useful for people whose drivers license has been suspended and they have to have insurance for their licensed to be reinstated.

Generally, liability coverage extends when you rent a car. Comprehensive policies also apply to the rental vehicle, although this should be verified beforehand. Full coverage premiums are based on, among other factors, the value of the insured’s vehicle. This coverage, however, cannot apply to rental cars because the insurance company does not want to assume responsibility for a claim greater than the value of the insured’s vehicle, assuming that a rental car may be worth more than the insured’s vehicle. Most rental car companies offer insurance to cover damage to the rental vehicle. These policies may be unnecessary for many customers as credit card companies, such as Visa and MasterCard, now provide supplemental collision damage coverage to rental cars if the transaction is processed using one of their cards. These benefits are restrictive in terms of the types of vehicles covered

Insurance Supervision

Prepared by a staff team from the International Monetary Fund on the basis of information provided by the Bulgarian authorities.
Prepared in August 1999 and reissued in March 2000
1. The description that follows examines financial policy transparency in the area of insurance supervision in Bulgaria. The first section covers the broad principles underlying the IMF’s Code of Good Practices on Transparency in Monetary and Financial Policies . The Code identifies desirable transparency practices for insurance supervisors in their conduct of insurance supervision. Following the Code, this chapter reviews: clarity of the roles, responsibilities, and objectives of the agencies implementing regulation and supervision of the insurance industry; the processes for formulating and reporting policies for them; public availability of information on such policies; and the accountability and assurances of integrity by the insurance regulators. The second section provides a summary of the authorities’ views on the extent to which domestic practices are consistent with existing international standards.
2. Transparency by the National Insurance Council (NIC) and the Insurance Surveillance Directorate (ISD), particularly in clarifying their objectives, should contribute to policy effectiveness by enabling financial market participants to assess better the context of insurance supervision, thereby reducing uncertainty in the decision making of market participants. Moreover, by enabling market participants and the general public to understand and evaluate insurance supervision policies, transparency is likely to be conducive to good policymaking. This can help to promote financial as well as systemic stability. Transparent descriptions of the policy formulation process provide the public with an understanding of the rules of the game. The release of adequate information to the public on the activities of insurance supervisors provides an additional mechanism for enhancing the credibility of their actions. There may also be circumstances when public accountability of decisions by supervisors can reduce the potential for moral hazard.
A. Description of Practice
Clarity of roles, responsibilities, and objectives
3. The institutional framework is defined in the Insurance Business Act (IBA) and in the implementing regulations. The objectives of the NIC and ISD, as defined in the IBA and the implementing regulations, are to promote “financial stability, market and systemic stability, competitive and fair markets, client asset protection, and enforcement of laws and regulations.” Moreover, the “ISD supervises the activities of insurers in conformance with the law and advises the NIC on granting and terminating licenses, merging, consolidating, dividing, or transferring portfolios of insurance companies; initiates insolvency procedures; takes prudential measures against undercapitalized and illiquid insurers; appoints conservators and keeps a register of licenses granted; and approves or disapproves rehabilitation plans.” These objectives have been revealed in the legislation, written reports to the legislature and other public bodies, public appearances before the legislature, the Annual reports, press releases to the media, and publication in the Official Gazette.

4. The ISD’s and NIC’s relationships with the MOF and COM are specified in the Act. The NIC comprises the Minister of Finance, who acts as Chairperson; three other ministers; the Director of the ISD; a representative of the Insurers’ Association; and an academic expert in insurance. The NIC, which is not a politically independent body, has the power to grant and revoke licenses to conduct insurance business in Bulgaria and to authorize merger or to initiate insolvency proceedings. The relationship between the NIC and the ISD is not clearly specified in the law. The ISD is a juristic person within the MOF, and its Director is appointed and dismissed by the Prime Minister (PM) on the recommendation of the NIC, and its budget is controlled by the MOF. Procedures for appointment to the ISD and the terms of the office are defined in the IBA and the ordinance. Only one ground for removal is laid out in the IBA (releasing confidential data), while other grounds (premeditated crime or prolonged incapacity) are specified in the Regulation on the Structure and Operation of the Insurance Supervision Directorate. There are no legal protections for officials and staff in the conduct of their official duties.
5. The relationships of these institutions with BNB, the MOF, and the Ministry of Justice and Legal Euro Integration are specified in regulation and have been publicly disclosed in the State Gazette. The ISD maintains a department for international cooperation and officials have stated that they maintain close cooperation with the MOF and the BNB, and particularly its banking supervision department. Such cooperation is essential as insurance companies are permitted under Bulgarian law to own up to 99 percent of the shares of commercial banks and, while banks cannot own insurance companies outright, they can own shares in insurance companies. In addition, the agency officials report that they maintain close contact with international supervisory bodies.

Open process for formulating and reporting policies
6. The ISD’s operating procedures are specified in law and regulation and have been reported in public appearances before the legislature, the State Gazette, and press releases. The regulations for financial reporting by financial institutions to the ISD have been publicly disclosed in the IBA, where insurers are required to report annual balance sheets to the ISD within four months of the end of the reporting period. Insurers also are required to release their annual reports in at least two national newspapers. The Act requires insurers to obtain audits of their accounts by at least 2 certified public accountants and mandates that these independent auditors report material breaches of regulations to the ISD. The Act also specifies the documents that must be submitted in order to obtain a license. The ISD in turn is required to disclose the terms of fees that it charges to financial institutions and the public. The IBA specifies the types of fees that the ISD may charge, and regulations provide greater detail. The schedule of charges has been approved by the COM and published in the State Gazette.

7. While not specified in the IBA law or the regulations reviewed by the staff, ISD officials report that they utilize written reports to and public appearances before Parliament, the Annual Report, State Gazette and press releases to disclose information on changes in regulations immediately after a decision is made.

Public availability of information on policies
8. Under the IBA, the ISD reports only to the NIC and MOF. However, Directorate officials state that they will soon issue the first annual report that will describe its activities and the condition of the insurance markets. In addition, the monthly newspaper, The Insurer, carries such information. Moreover, ISD officials make written reports to, and public appearances before, the legislature, and provide press releases. To conduct its publication program, the ISD maintains a Publications Department. The publications are provided free of charge. The ISD submits its budget to the MOF monthly and to the legislature in writing.

9. The ISD has an obligation to provide aggregate data that relate to its jurisdictional responsibilities. It fulfils this obligation monthly in the Insurer newspaper and annually in its Annual Report. It also reports in writing to, and via public appearance before, the legislature, in the State Gazette, and through press releases. The ISD maintains a register of licensed insurers. This register contains very detailed information and, consequently, is not published. However, a list of licensed insurers is kept and is available to anyone who requests it at the ISD’s office in Sofia, or will be sent in response to a request received by phone or fax. In addition, a list of licensed insurers has been published in local newspapers and in one German paper. In addition, this list will be published in the forthcoming Annual Report.

10. The texts of legislation and regulations are readily available to the public through the State Gazette and Annual Report. Applicable directives are published in the State Gazette. In addition, all guidelines are sent directly to licensed insurance companies. They are not published, but agency officials stated that they would be published in newspapers if the public showed an interest in them. Minutes of NIC meetings are maintained and relevant sections are sent to the insurers who are affected by the decisions that have been taken. In addition, summaries of the minutes are released to the media.

11. Guarantees and consumer protection arrangements are publicly available. A system of guarantees for holders of accident policies was promised in the IBA, and a Guarantee Fund was founded and made operational in 1997. In particular, the IBA states that “a Guarantee Fund shall be set up to pay third party accident insurance where the perpetrator cannot be found or is uninsured.” In addition, the ISD has, and has publicly disclosed, its consumer protection arrangements. Beyond the guarantee noted above, consumer protection arrangements are not provided. There are, however, provisions for insurers to appeal adverse decisions under the Administrative Procedures Act. In addition, agency officials stated that there are provisions for disagreements between policyholders and their insurer to be submitted to the ISD for adjudication.

12. The ISD sends its financial statements to the MOF and has not yet published them itself. However, the agency’s financial statements can be found in the section on the MOF in the Government’s financial statements. The ISD sends its financial statements to the National Audit Office and does not utilize the services of independent auditors. Accounting policies and qualifications to the accounts are disclosed.

Accountability and assurances of integrity
13. The modalities of the two agencies’ accountability have been publicly defined in legislation, which allows appeal under the Administrative Procedures Act against the NIC’s decisions, and requires the ISD to report to the MOF. The officials are not required to appear before a designated public authority. The insurance supervisor is responsible to the MOF, who would presumably take this responsibility. However, the Director of the ISD is available to appear before the legislature to explain the ISD’s objectives and performance and to exchange views on the condition of the financial system.

14. The ISD does not have the internal governance procedures and internal audit arrangements that are necessary to ensure the integrity of its operations. Moreover, there is no code of good conduct. However, the IBA forbids disclosing confidential information except in approved circumstances. Breaching this requirement could presumably be grounds for dismissal.

B. IMF Staff Commentary

15. The ISD is making determined progress toward achieving transparency in insurance regulation in Bulgaria. Nevertheless, further improvements would be welcome:
It would be important to strengthen the Insurance Business Act to increase the ISD’s autonomy and to clarify its roles and relationships with the NIC, MOF, and COM.
Greater transparency is needed in the regulations and practices regarding cross holdings between banks and insurance companies.

C. Observance of International Principles and Standards

16. ISD has been a member of the International Association of Insurance Supervisors (IAIS) since October 1998. Officials state that they have no fundamental disagreements with international best practices, and the NCI and ISD are becoming actively acquainted with the recommendations for best practices specified by the IAIS as well as by the OECD. Despite its relatively recent membership, experts from ISD are already participating in three subcommittees of the IAIS, on accounting standards and the insurance laws and by-law legislation within the Technical Committee of the IAIS.

17. Bulgaria is in the process of adopting IAIS standards, including through various amendments to the Insurance Act currently under consideration by the parliament. Existing laws are also being updated to comply with the European Union standards in this area, which are similar to the IAIS recommendations. These amendments will bring Bulgaria into almost complete compliance with the IAIS standards for insurance markets. In particular, the frequency and standards of supervision of the insurance industry, as well as the penalties and sanctions for non-compliance with supervision standards, will comply with the standards established by the IAIS in these areas. The only IAIS standard that is not included in the present revisions is the Supervisory Standard on Derivatives. This was judged unnecessary as Bulgaria does not yet have an active market on derivatives. The adoption of the IAIS model Memorandum of Understanding on Exchange of Information with Other Countries is part of the proposed new law on amending and supplementing the Insurance Act. Bulgaria has not conducted a self-assessment of its observance of the IAIS Insurance Supervisory Principles, mainly because it has no legal basis for doing so. Officials expect that these few differences between Bulgarian standards for insurance markets and international standards would remain as they reflect specific characteristics of the Bulgarian markets.
Enforcement of standards

18. In enforcing the Insurance Act, the ISD applies IAIS standards with regard to the frequency of supervision as well as penalties and sanctions. The ISD has the right to impose measures to improve the financial status of inadequately capitalized insurers; oblige an insurer to increase his capital; recommend to insurers measures to redress violations of legal acts and by-laws in the insurance sector; and take decisions on other issues related to the supervision of the insurance industry.

1 Prepared by Mr. Kähkönen and Mr. Feyzioğlu (both European I Department) and a team from the Monetary and Exchange Affairs Department of the IMF led by Mr. Coats, in consultation with the Bulgarian authorities. In preparing this chapter, IMF staff held discussions with officials of the Insurance Supervision Directorate (who completed a transparency questionnaire), the State Insurance Institute, the National Accountancy Department of the Ministry of Finance, and representatives of accounting firms. IMF staff also consulted the Law on the Bulgarian National Bank; the Law on Banks; the Insurance Business Act, the Ordinance for the Establishment and Organization of the Insurance Supervision Directorate, the Ordinance for the Establishment of the National Insurance Council, the Regulation on the Allocation of Insurance Reserve, Decree No. 19 on the Enactment of an Ordinance Regulating the Procedures and Methods of Setting up an Insurance Reserve, and the Regulation for Determining the Own Resources, Solvency Margin, and Its Calculation by Insurers.

2 While the ISD does not have a web site, insurance legislation is made available on the government’s web site.

3 This section represents a summary of the authorities’ description of practices in this area. No attempt has been made to provide an independent assessment of observance of standards in this area.

Life

Life insurance

Life insurance provides a monetary benefit to a decedent's family or other designated beneficiary, and may specifically provide for income to an insured person's family, burial, funeral and other final expenses. Life insurance policies often allow the option of having the proceeds paid to the beneficiary either in a lump sum cash payment or an annuity.

Annuities provide a stream of payments and are generally classified as insurance because they are issued by insurance companies and regulated as insurance and require the same kinds of actuarial and investment management expertise that life insurance requires. Annuities and pensions that pay a benefit for life are sometimes regarded as insurance against the possibility that a retiree will outlive his or her financial resources. In that sense, they are the complement of life insurance and, from an underwriting perspective, are the mirror image of life insurance.

Certain life insurance contracts accumulate cash values, which may be taken by the insured if the policy is surrendered or which may be borrowed against. Some policies, such as annuities and endowment policies, are financial instruments to accumulate or liquidate wealth when it is needed.
In many countries, such as the U.S. and the UK, the tax law provides that the interest on this cash value is not taxable under certain circumstances. This leads to widespread use of life insurance as a tax-efficient method of saving as well as protection in the event of early death.

In U.S., the tax on interest income on life insurance policies and annuities is generally deferred. However, in some cases the benefit derived from tax deferral may be offset by a low return. This depends upon the insuring company, the type of policy and other variables (mortality, market return, etc.). Moreover, other income tax saving vehicles (e.g., IRAs, 401(k) plans, Roth IRAs) may be better alternatives for value accumulation.

INSURANCE

Global insurance industry

Global insurance premiums grew by 11% in 2007 (or 3.3% in real terms) to reach $4.1 trillion. The macro-economic environment was characterised by slower economic growth in 2007 and rising inflation. Profitability improved in life insurance and fell slightly in the non-life sector during the year. Life insurance premiums grew by 12.6%, accelerating in the advanced economies with the exception of Japan and Continental Europe. Non-life insurance premiums grew by 7.6% during the year. Figures for premium income are not yet available for 2008, but the insurance industry is likely to see a slowdown in new business and falling investment revenue.
Advanced economies account for the bulk of global insurance. With premium income of $1,681, Europe was the most important region, followed by North America ($1,330) and Asia ($814). The top four countries accounted for nearly 60% of premiums in 2007. The US and UK alone accounted for 42% of world insurance, much higher than their 7% share of the global population. Emerging markets accounted for over 85% of the world’s population but generated only around 10% of premiums.

Global Insurance IndustrY

Global insurance premiums grew by 11% in 2007 (or 3.3% in real terms) to reach $4.1 trillion. The macro-economic environment was characterised by slower economic growth in 2007 and rising inflation. Profitability improved in life insurance and fell slightly in the non-life sector during the year. Life insurance premiums grew by 12.6%, accelerating in the advanced economies with the exception of Japan and Continental Europe. Non-life insurance premiums grew by 7.6% during the year. Figures for premium income are not yet available for 2008, but the insurance industry is likely to see a slowdown in new business and falling investment revenue.
Advanced economies account for the bulk of global insurance. With premium income of $1,681bn, Europe was the most important region, followed by North America ($1,330bn) and Asia ($814bn). The top four countries accounted for nearly 60% of premiums in 2007. The US and UK alone accounted for 42% of world insurance, much higher than their 7% share of the global population. Emerging markets accounted for over 85% of the world’s population but generated only around 10% of premiums.

Insurance

Principles of insurance

Financial market participants

Collective investment schemesCredit UnionsInsurance companiesInvestment banksPension fundsPrime BrokersTrusts
Finance seriesFinancial marketParticipantsCorporate financePersonal financePublic financeBanks and BankingFinancial regulation
v • d • e
Commercially insurable risks typically share seven common characteristics.
A large number of homogeneous exposure units. The vast majority of insurance policies are provided for individual members of very large classes. Automobile insurance, for example, covered about 175 million automobiles in the United States in 2004.The existence of a large number of homogeneous exposure units allows insurers to benefit from the so-called “law of large numbers,” which in effect states that as the number of exposure units increases, the actual results are increasingly likely to become close to expected results. There are exceptions to this criterion. Lloyd's of London is famous for insuring the life or health of actors, actresses and sports figures. Satellite Launch insurance covers events that are infrequent. Large commercial property policies may insure exceptional properties for which there are no ‘homogeneous’ exposure units. Despite failing on this criterion, many exposures like these are generally considered to be insurable.

Definite Loss. The event that gives rise to the loss that is subject to the insured, at least in principle, take place at a known time, in a known place, and from a known cause. The classic example is death of an insured person on a life insurance policy. Fire, automobile accidents, and worker injuries may all easily meet this criterion. Other types of losses may only be definite in theory. Occupational disease, for instance, may involve prolonged exposure to injurious conditions where no specific time, place or cause is identifiable. Ideally, the time, place and cause of a loss should be clear enough that a reasonable person, with sufficient information, could objectively verify all three elements.

Accidental Loss. The event that constitutes the trigger of a claim should be fortuitous, or at least outside the control of the beneficiary of the insurance. The loss should be ‘pure,’ in the sense that it results from an event for which there is only the opportunity for cost. Events that contain speculative elements, such as ordinary business risks, are generally not considered insurable.
Large Loss. The size of the loss must be meaningful from the perspective of the insured. Insurance premiums need to cover both the expected cost of losses, plus the cost of issuing and administering the policy, adjusting losses, and supplying the capital needed to reasonably assure that the insurer will be able to pay claims. For small losses these latter costs may be several times the size of the expected cost of losses. There is little point in paying such costs unless the protection offered has real value to a buyer.
Affordable Premium. If the likelihood of an insured event is so high, or the cost of the event so large, that the resulting premium is large relative to the amount of protection offered, it is not likely that anyone will buy insurance, even if on offer. Further, as the accounting profession formally recognizes in financial accounting standards, the premium cannot be so large that there is not a reasonable chance of a significant loss to the insurer. If there is no such chance of loss, the transaction may have the form of insurance, but not the substance. (See the U.S. Financial Accounting Standards Board standard number 113)
Calculable Loss. There are two elements that must be at least estimable, if not formally calculable: the probability of loss, and the attendant cost. Probability of loss is generally an empirical exercise, while cost has more to do with the ability of a reasonable person in possession of a copy of the insurance policy and a proof of loss associated with a claim presented under that policy to make a reasonably definite and objective evaluation of the amount of the loss recoverable as a result of the claim.

Limited risk of catastrophically large losses. The essential risk is often aggregation. If the same event can cause losses to numerous policyholders of the same insurer, the ability of that insurer to issue policies becomes constrained, not by factors surrounding the individual characteristics of a given policyholder, but by the factors surrounding the sum of all policyholders so exposed. Typically, insurers prefer to limit their exposure to a loss from a single event to some small portion of their capital base, on the order of 5 percent. Where the loss can be aggregated, or an individual policy could produce exceptionally large claims, the capital constraint will restrict an insurer's appetite for additional policyholders. The classic example is earthquake insurance, where the ability of an underwriter to issue a new policy depends on the number and size of the policies that it has already underwritten. Wind insurance in hurricane zones, particularly along coast lines, is another example of this phenomenon. In extreme cases, the aggregation can affect the entire industry, since the combined capital of insurers and reinsurers can be small compared to the needs of potential policyholders in areas exposed to aggregation risk. In commercial fire insurance it is possible to find single properties whose total exposed value is well in excess of any individual insurer’s capital constraint. Such properties are generally shared among several insurers, or are insured by a single insurer who syndicates the risk into the reinsurance market.