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What Are The Steps To Create An Insurance Company?

By February 8, 2021 No Comments

Insurance is a company that assures payment to its consumers in case of any loss or damage to their belongings. Some insurance companies provide damages as a result of death, illness, or injury to their users. Such companies are known health insurance companies. Other insurance companies include auto insurance companies, stock insurance companies, etc.

Insurance companies can operate only in areas of high population. In such places, one can estimate events such as deaths, losses, and accidents with accuracy. On the biases of such calculations, insurance companies can decide their next move. In places where the population is less dense, it is unpredictable what would happen next and may lead to the company bearing a loss.

The concept of insurance companies was initially brought up and practiced by the merchants of Babylon’s at around 4000-3000 BCE. , It was known as bottomry contracts during that era. It soon became common among the Hindus, in Greece and later spread across Rome and other parts of the world.

The bottomry contracts allowed merchants to take loans. A guarantee was provided that they would not have to repay the loan if the shipment gets lost at sea. The interest on the loan would compensate for the insurance risk. In Rome, funeral societies would deal with funeral costs of family members from their monthly income.

It was in England, following the great fire, after which official insurance companies started to form in 1711. Initially, however, the majorities of these companies were frauds and were schemes to trick the locals however they led to the creation of two insurance companies by the names of the London Assurance Cooperation and the Royal Exchange Assurance Cooperation.

The mention of Lloyd’s of London cannot go unnoticed when speaking of insurance companies. It started as a coffee house that became a hub for bankers, merchants, and insurance underwriters. It soon became famous as a place where one was likely to find a marine underwriter. An underwriter is a practice in which a person writes his name under the total amount of risk he was willing to accept for a specific amount.

Edward Lloyd would provide his customers with information on the sea from his sources. In 1706 it was formally recognized as a group of underwriters willing to accept the risks involved in shipping goods to different places. As the success of Lloyd’s of London grew, they extended their platform and began proving insurance for fires and properties.

Benjamin Franklin created the first American insurance company known as the Philadelphia Contribution in 1752. After 75 years, there were over 17 insurance companies in New York alone. As this was a new concept in the region, a number of these companies failed due to poor management, lack of investment, and improper system of distribution.

Many others failed due to natural disasters such as the Great Chicago fire in 1871 and the Francisco earthquake that levied heavy losses on such companies. The majority of these companies were of property insurance.

A decline in the number of insurance companies was recorded between the years 1870-1872 and in 1873-1877. The US civil war was one of the factors leading to this. Moreover, advertisements were exaggerated.  Companies would spend more than their financial assets. It was in the early 1900s that the USA began to see growth in this sector.

The development of such companies in England and the USA marked the rise of insurance companies worldwide. Such practices soon spread across Russian, Japan, and Eastern Europe.

Steps to create an insurance company:

 

Unlike starting any other company, the first step is to perform extensive research. One must gather all the required information to start a company and establish a strong base so that the company may survive in the market. In the case of insurance companies, one must learn about their market and their target customers. One must devise steps to penetrate the market and work to survive in the market.

A person must make up his mind and always be ready to enjoy the profits and bear the loss. That is what makes one a successful entrepreneur. They must think about what kind of insurance company they should start. It should be one with the minimum competition with the availability of customers.

The business plan should also include the budget plan. The company must also possess one quality that makes the company unique among its competitors.

Upon creating a business plan, the next move will be to set up a legal structure. The legal structure will determine the legal liability placed on the company. One can choose from a sole partnership, partnership, limited liability partnership, cooperation, and corporation. It is a crucial decision as structures tend to be cheap and easy to set up but will pose a risk to the company’s assets when there is legal trouble.

Other structures are costly and complex to set up but at a difficult time, they work like wonders. So when making a company, this decision must be so that the company chooses a legal structure that best fits them. Upon completion of this task, one must move a step forward and register the company name. A name is the identity of a company and should have certain qualities: must be easy to spell and remember, must provide a clear idea as to what the company deals with. It must be easy to search.

However, states tend to prohibit using such words that mislead potential customers as to what the company is. The state government does not allow copying the name of another company. The name of a company is registered after payment of a small fee.

Corporations and partnerships are required to use a federal employer identification number. This is used to file taxes. This is also used to open a business account. Once the id is acquired, one must register the company with the state. A small fee will be charged after confirmation that the terms and conditions of the company comply with the state requirements. One must then get a business license or permit to start working legally.

The final step is to purchase insurance to protect the investment in the company. The type of insurance will depend upon the legal structure that the business has chosen. The General liability insurance protects the company from lawsuits regarding damage to customer property and injuries. The Errors and Omissions protect the company from lawsuits for errors made by the company. One must take risks and try out different insurances as this is what makes one a successful entrepreneur.

Types of insurance companies:

 

Contracts cover losses of damage caused due to collisions, medical expenses due to injury to the driver and the passenger, etc. In short, the marine insurance companies were the first type of insurance companies formed. Today, many other types of insurance companies are established on the biases of the same concept. After the marine insurance, fire and property insurance companies were formed in England. Another name for marine insurance is inland insurance.

A contract of ocean marine insurance covers four things:  the vessel, the cargo, the revenue of freight that is to be received by the owner of the ship, and the loss that is a result of the carelessness of the ship operator.

Inland insurance provides aid for collisions, derailment, rising water, tornado, fire, lightning, and windstorm. However, their contracts usually do not include property damage due to strikes, riots, war, breakage, leakage, delay in shipment, loss of market, and illegal trade.

The most commonly known type is property insurance. It involves two types of contracts: homeowners and commercial. These contracts are to insure loss due to the destruction of property. These contracts include insuring agreements, identification of covered property, conditions, stipulations, and exclusions.

Other forms of insurances, for instance, fire insurance, flood insurance, earthquake insurance, and are all parts of property insurance. They are insurances that provide aid in case of any natural disaster that may lead to damage to property.

Another type of insurance is liability insurance. This insurance comes to aid when a person commits a negligent act that makes him liable to pay a large sum for the loss that he has caused. In cases, a judgment made a person liable to pay such an amount that would require a lifetime to get rid of. Having liability insurance would have been significant in such cases.

Moreover, liability insurance contracts are of four types, liability due to use of vehicles, liability due to conduct of business, liability due to professional negligence that is for doctors, lawyers, and personal liability. A similarity in the four types of contracts is that the insurer is liable to pay damages that the insured is obligated to pay. It includes injury, sickness, disease, wrongful death, or injury to another person’s property.

The liability policy states that the company is liable to pay damages legally obligated to the insured. They may resort to the court when deciding what amount to pay in damages. However, this issue is resolved upon consulting with the affected party.

Automobile insurance companies are more common and at large today. It covers more than half of the property-liability incurrence companies in the United States. Its coverage applies to those who are inside the vehicle, with the permission of the person who has insured the vehicle.

It also covers liability for persons who have responsibility for the actions of their driver. There is mostly no coverage for the time a vehicle spends in a foreign country.

A rise in the number of thefts has led to an increase in the number of theft insurance companies over time. Theft insurance includes all acts of theft. Its contract has three types of insurance, burglary, robbery, and other theft.  Burglary is defined as theft of good by a trespasser, whose presence is not known and if known is opposed to, where there is valid evidence of forcible entry.

A robbery is an act in which belongings of one are taken by another by the use of force or violence. To be liable for violence, there must have been the presence of personal contact. The majority of the coverages during theft are on damage caused to safes and other items that have been damaged by explosives during the act of robbery.

Aviation insurance companies are present to cover physical damages to aircraft that prevent them from being used. Besides, policies to cover the legal liability of airport owners from the operation of airports or the trade of aviation parts are also available. A loss of up to $300,000,000 or more can occur from physical damage to aircraft and liability combined. However, it is not easy to accurately predict the total loss as different aircraft have different characteristics costing an amount.

Policies are present that cover the cost of injury to operators and passengers and for property damage. Medical cost for disabled passengers and cost of loss of income is also covered by these policies. It does not require the need to prove a negligent act. Such policies are known as the admitted liability insurance.

Another type of insurance is workers’ compensation insurance. It is also known as industrial injury compensation. It deals with the medical cost of workers the come from the injuries they suffer during their employment. This is covered despite the presence of negligent acts. However, these perks are not given to some workers in the country.

Such workers include those working in agriculture in countries such as Canada and countries of Eastern Europe. Employees of lower-class like servants are excluded from this. In many parts of the UK, middle-class workers are also among those that are excluded from this.

Advantages of insurance companies:

 

Insurance companies are merit goods. One cannot receive all its benefits at the time of consumption. Initially, due to this imperfect information, people were reluctant to use such companies. However, as the world has seen an increase in the literacy rate, people have come to realize how beneficial such contracts can be. Say a person is covered by health insurance; he suffers from fatal injuries and requires a large sum that his family cannot financially afford. At that, the health insurance company will come to his aid and cover his expenses.

Having your business covered by insurance also helps a business. It provides economic protection and reduces risks. Moreover, insurance companies are also willing to grant loans to those eligible and in need. In addition to that, it creates employment opportunities and promotes foreign trade. It helps maintain a standard of living and reduces inflation in the economy making life easy.

Disadvantages of insurance companies:

 

Despite the advantages, there may also be some drawbacks to using insurance companies. At times, when a business suffers from loss, insurance companies take too long to review the damage and cover the costs. This can be frustrating and can halt the operation of a company.

Furthermore, companies are engaged in devising methods to cut unnecessary expenses to save money. Although having being insured has its perks, it creates financial constraints for companies especially the newly established and insured companies.

The legal formalities involved in the process of compensation by insurance companies can also be frustrating. Moreover, insurance companies do not cover all types of costs. These have the intention to compensate the least possible amount. This is one method for them to increase their profits. It can lead to criminal violence in society. People intentionally cause to their belongings or they may add to it thinking that the insurance companies will fix it for them. This practice is common when talking about vehicles.

One should be insured as long as it is affordable. No one can predict the future so such insurances can come into use following any mishap in the future.

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