Controversies

Insurance insulates too much:

By creating a "security blanket" for its insureds, an insurance company may inadvertently find that its

insureds may not be as risk-averse as they might otherwise be (since, by definition, the insured has

transferred the risk to the insurer). This problem is known to the insurance industry as moral hazard.

To reduce their own financial exposure, insurance companies have contractual clauses that mitigate

their obligation to provide coverage if the insured engages in behavior that grossly magnifies their

risk of loss or liability.

Closed community self-insurance:

Some communities prefer to create virtual insurance amongst themselves by other means than

contractual risk transfer, which assigns explicit numerical values to risk. A number of religious

groups, including the Amish and some Muslim groups, depend on support provided by their

communities when disasters strike. The risk presented by any given person is assumed collectively by

the community who all bear the cost of rebuilding lost property and supporting people whose needs

are suddenly greater after a loss of some kind. In supportive communities where others can be

trusted to follow community leaders, this tacit form of insurance can work. In this manner the

community can even out the extreme differences in insurability that exist among its members. Some

further justification is also provided by invoking the moral hazard of explicit insurance contracts.

Complexity of insurance policy contracts

Insurance policies can be complex and some policyholders may not understand all the fees and

coverages included in a policy. As a result, people may buy policies on unfavorable terms. In

response to these issues, many countries have enacted detailed statutory and regulatory regimes

governing every aspect of the insurance business, including minimum standards for policies and the

ways in which they may be advertised and sold.

Many institutional insurance purchasers buy insurance through an insurance broker. Brokers

represent the buyer (not the insurance company), and typically counsel the buyer on appropriate

coverages, policy limitations.Insurance may also be purchased through an agent. Unlike a broker,

who represents the policyholder, an agent represents the insurance company from whom the

policyholder buys. An agent can represent more than one company.

Health insurance

Health insurance, which is coverage for individuals to protect them against medical costs, is a highly

charged and political issue in the United States, which does not have socialized health coverage. In

theory, the market for health insurance should function in a manner similar to other insurance

coverages, but the skyrocketing cost of health coverage has disrupted markets around the globe, but

perhaps most glaringly in the U.S. See health insurance & Health insurance in the United States.

The insurance industry and rent seeking

Certain insurance products and practices have been described as rent seeking by critics. That is,

some insurance products or practices are useful primarily because of legal benefits, such as reducing

taxes, as opposed to providing protection against risks of adverse events. Under United States tax

law, for example, most owners of variable annuities and variable life insurance can invest their

premium payments in the stock market and defer or eliminate paying any taxes on their investments

until withdrawals are made. Sometimes this tax deferral is the only reason people use these

products. Another example is the legal infrastructure which allows life insurance to be held in an

irrevocable trust which is used to pay an estate tax while the proceeds themselves are immune from

the estate tax.

Criticism of insurance companies

Some people believe that modern insurance companies are money-making businesses which have

little interest in insurance.
criticisms include:
* Insurance policies contain too many exclusion clauses. For example, some house insurance

policies do not cover damage to garden walls.

* Most insurance companies now use call centres and staff attempt to answer questions by reading

from a script. It is difficult to speak to anybody with expert knowledge.