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How Insurance Works in New York

In New York, both private and government agencies provide insurance. Government agencies typically provide health-related insurance coverage, such as Medicare, Medicaid, and Children Health Insurance Program (CHIP). Taxpayers fund these programs, and they are established to meet the state’s welfare objectives. Meanwhile, private insurance companies are funded by premiums. A premium is the amount of money stipulated in an insurance contract that an individual or a business pays to their insurance provider to keep their insurance coverage active. It can be paid upfront or in monthly installments. The cost of premiums an insured person or business pays is determined by how much of a risk they pose to the insurer. The higher the risk, the higher the cost of the insurance premium. For example, the cost of a pharmaceutical company’s business liability insurance would be more than that of a small convenience store due to the number and level of risks to which the former is exposed.

Individuals and businesses in New York can use insurance policy to manage their risks. Insurance companies offer different types of insurance coverage that cover various aspects of life, mostly falling into the following categories (with the exception of specialized coverage):

New York residents and authorized businesses operating in the state can get insurance coverages through licensed insurance agents. Experienced agents have access to different types of insurance products and the knowledge to help make the best insurance policy choices.

The Department of Financial Services (DFS) is the agency responsible for regulating all insurance business activities in New York. It oversees the activities of over 1,700 insurance companies in the state. The DFS also ensures insurance consumer protection by receiving and resolving complaints concerning insurance companies under their jurisdiction.

How Does New York Insurance Work?

Insurance is a contract in which an individual or a business receives financial protection against a loss or compensation from an insurance provider in the form of a policy. In New York, insurance providers pool their clients’ risks to make payments easier for the insureds.

An insured person or business is required to pay premiums to keep their insurance policy active once purchased. It is on this basis that an insurance company provides coverage; It pays for losses that would have ordinarily been borne by an insured. Premiums can be paid upfront or in installments. The basic premise of insurance is that distributing risks across many people minimizes overall risks.

In New York, a typical insurance company has a pool of customers who all pay premiums. However, it is impossible for all insured clients to experience losses or file claims at the same time, enabling an insurance company to be able to pay the agreed-upon amount in the event of a covered loss or damage.

What is an Insurance Claim?

An insurance claim is an official request to an insurance provider for compensation based on the terms and conditions in an insurance policy. Once a claim is received, the insurance company examines it for authenticity and pays out to the insured or the party filing a claim on behalf of an insured 3rd party.

There are 4 main types of insurance claims. All of them are prominently featured in both private and commercial insurance in New York:

  • Property damage claims

  • Bodily injury claims

  • Liability coverage claims

  • Death benefit on a life insurance policy

The most common Private insurance claims in New York are for:

  • Residential property damage due to wind, hail, water damage, and freezing

  • Private auto insurance property and bodily injury

  • Liability coverage for medical bills, legal fees, and other covered losses

  • Theft of a private auto and/or personal possessions from it

The average personal property coverage claim (not counting Flood) in New York is $23,000

The most common Commercial insurance claims in New York are for:

  • Crime related losses (theft, burglary, etc.)

  • Property damage resulting from wind, freeze, or fire

  • Auto accident property and bodily injury damages

  • Product liability

  • Customer injury and property damage

  • Professional liability (E&O and Medical Malpractice)

The average commercial insurance claim in New York is $28,000.

When a covered loss occurs and a claim is filed with the insurer, an insurance company may sometimes reject or adjust your claims for the following reasons:

  1. You may have provided false or insufficient information when submitting your claim. For instance, how an accident occurred

  2. You do not have enough coverage to cover your loss

  3. If your insurance company feels the value you put in your claim is unrealistic. In this case, they may decide to pay just part of it

If your insurer rejects your claim, they are required to provide you with access to both internal and external appeals. Before making an external appeal, you must first attempt to address a complaint through the insurer's internal review process. Ensure to involve a licensed insurance agent when filing your insurance claim.

What is the Cost of Insurance?

The cost of insurance in New York depends on different factors. The type of insurance coverage purchased is one of these factors. For instance, the cost of a business insurance policy would depend on the type of business being insured, the location of the business, and the industry in which the business operates. In the case of health insurance, the cost would depend on the age of the insured or their medical history.

Another factor affecting the cost of insurance in New York is the intervals within which payments are made. For instance, paying for insurance premiums upfront will cost less than paying in monthly installments due because monthly premium payments attract certain administrative fees.

Speak to a licensed New York insurance agent to find out the cost of insurance and to get a custom quote based on your particular insurance needs.

How Can Insurance Companies Afford to Pay Out Claims?

In New York, insurance companies generate revenues to pay out insurance claims in the following ways:

  • Underwriting income

  • Investment income

  • Reinsurance

  1. Underwriting income
    Insurance companies in New York make money to pay out claims via underwriting revenue which is the profit generated when insurance companies take on risks in exchange for premiums. It is the difference between the premiums paid to an insurance provider and the amount paid out in insurance claims

  2. Investment income
    Insurance companies can also afford to pay out claims through investment income. They invest clients’ premiums into the financial markets to increase their revenue. Since insurance companies do not need money to produce tangible products like pharmaceuticals or automobile companies, they can push their revenues into their investment portfolio and make more profits. These investments include mutual funds, real estate, transportation equipment, and bonds. Insurance companies like to invest in assets with attributes similar to the features of the insurance products. For example, the proceeds from a long-term insurance contract would be put into a long-term asset and the proceeds from the investments will be used to pay out claims. Article 14 of the New York Insurance Law regulates the investment activities of insurance companies in the state. It provides for the minimum capital or minimum surplus to policyholder investments for all investing insurance companies. It is believed that if an insurance provider's invested assets lose more value, they may be unable to pay out claims. Since the government cannot guarantee investment performance, the least it can do is put risk-reduction guidelines on investment operations

  3. Reinsurance
    Insurance companies also generate funds to pay out claims through reinsurance. This is insurance for insurance companies. Insurance companies are insured against declaring bankruptcy due to large claims, and reinsurance companies compensate them if something goes wrong. Reinsurance is used to take some of the financial risks off insurance firms and risk pools to another insurance company, as the objective is to transfer the risk of loss

What Happens if an Insurance Company Goes Bankrupt?

New York has certain measures in place to protect insured persons and businesses if their insurance provider goes bankrupt. One of the measures includes the Guaranty Fund Protection for life insurers. New York became the first state in the United States, in 1941, to create guarantee protection to safeguard insureds should their life insurance companies become insolvent. This fund is provided as a condition of conducting business in New York. Any life insurance provider licensed to do business in the state must be a member of the Guaranty Fund. There are also the Property/Casualty Security Funds and they are provided for under Article 76 of the New York Insurance Law.

If your insurer goes bankrupt in New York, the Superintendent of the DFS will act as a receiver and will seek a court order from the New York State Supreme Court to take control of the insurer’s business activities. A formal notification outlining the reasons for the takeover will be sent to you after the Superintendent, acting as receiver, intervenes to take control of your insurer. This notice will also be put in newspapers. Your insurer may be rehabilitated or liquidated under the supervision of the Superintendent. In the case of rehabilitation, the Superintendent will try to put your insurer back on solid financial footing. In a liquidation, the Superintendent takes action to eventually dissolve the insurance. These methods are created to aid the Superintendent in protecting you, as a policyholder.

What are the Insurance Company Ratings?

An insurance provider's credit rating is the assessment of their financial strength by an independent entity. It indicates an insurer’s ability to pay claims filed by insureds. An insurance company's credit rating is a matter of opinion and not a fact. For instance, in New York, different rating agencies may give varying ratings to an insurance provider.

The financial strength of insurance businesses is rated by five independent agencies: A.M. Best, Fitch, Kroll Bond Rating Agency (KBRA), Moody's, and Standard & Poor's. Each agency has its rating system, rating requirements, rated company population, and company distribution over the scale. To show minor differences in rating from another rating class, each agency utilizes numbers, plusses, and minuses.

Generally, you should evaluate an insurance company's rating before purchasing coverage because it demonstrates their ability to pay claims, especially in times of financial stress. It is important not to depend on what insurance companies say about their credit ratings as they may only mention high ratings and ignore lower ones.

How Do Insurance Companies Make Money?

There are two main ways insurance providers in New York make money. These are:

  1. Underwriting income
    A substantial portion of an insurance provider's revenue comes from underwriting. Insurance providers hire actuaries to estimate the financial risks of insuring various circumstances using statistics and mathematical models. Once the financial risks have been assessed, specific insurance plans can be established and premiums determined for each type of insurance plan

  2. Investment income
    Premiums bring in a lot of money for insurance providers. They are not obligated to pay any money till an insurance claim is filed. Due to this, insurance providers set aside a portion of the money earned from premium payments to cater to sudden claims and invest the rest. Underwriting income is often substantially higher than investment income. Many insurance providers obey state restrictions and have a conservative investment approach.

While underwriting and investment income serve as primary sources of revenue generation for insurance providers in New York, they also make money via:

  1. Cash Value Cancellations
    Insurance providers make income from cash value cancellations. Sometimes, insureds whose cash value accounts have accumulated a lot of money may wish to end their insurance policy prematurely to enable them to access such funds. Insurance providers do not hesitate to oblige such requests because once a policy is canceled, the insurance provider’s liability ends. Insurance providers hold on to all paid premiums, pays the insured with interests earned on their investments, and keeps the remaining funds. In this respect, cash value rewards are a monetary benefit for insurance providers

  2. Coverage lapse
    Insured persons or businesses sometimes fail to renew their insurance coverage, putting an insurance provider in a beneficial position. A policy lapses when an insurance policy ends with no claims being paid out as stipulated by the policy contract. Insurance providers benefit from this situation since they get to keep all previous premiums paid by the customer, with no likelihood of a claim being paid

If you have any further questions about insurance in New York, speak with a knowledgeable and state-licensed insurance agent who has access to multiple insurers and can help you compare coverages until you find the one that fits your particular needs and cost objectives.