They understand that not all insured individuals will suffer losses at the same time or at all. This allows the insurance companies to operate profitably and at the same time pay for claims that may arise. as an example, the majority have auto insurance but only a few truly get into an accident. You pay for the probability of the loss and for the protection that you will be paid for losses in the event they occur.
Risks
Life is full of risks, some are preventable or will a minimum of be decreased , some are avoidable and some are completely unforeseeable. What's necessary to know about risk when thinking about insurance is the type of risk, the effect of that risk, the cost of the risk and what you can do to mitigate the risk. Let's take the example of driving a car.Type of risk: Total loss of vehicle, having to repair your vehicle,Bodily injury
The effect: Having to rent a car and having to make car payments for a car that no longer exists, Spending time in the hospital.
The costs: Can range from small to terribly massive
Mitigating risk: Not driving in the least (risk avoidance), turning into a secure driver (you still have to contend with different drivers), or transferring the risk to someone else (insurance)
Let's explore this concept of risk management (or mitigation) principles a bit deeper and look at how you may apply them. The essential risk management tools indicate that risks that could bring financial losses and whose severity cannot be reduced ought to be transferred. You must also consider the relationship between the cost of risk transfer and the value of transferring that risk.
Risk Financing
If you choose to retain your risk exposures, then you be able to either transfer that risk (ie. to an insurance company), or you retain that risk either voluntarily (ie. you identify and accept the risk) or involuntarily (you identify the risk, but no insurance is available).
Risk Control
There are 2 ways that risks can be controlled. You be able to avoid the risk altogether, otherwise you can choose to minimize your risk.
Risk Sharing
Finally, you may also decide to share risk. For example, a business owner may decide that while he is willing to assume the risk of a new venture, he may want to share the risk with other owners by incorporating his business.
Back to our driving example. If you may get eliminate of the risk altogether, there would be no need for insurance. The only way this might happen in this case would be to avoid driving altogether. Also, if the cost of the loss or the effect of the loss is reasonable to you, then you may not need insurance.
Risks that involve a high severity of loss and a low frequency of loss, then risk transference (ie. insurance) is probably the most appropriate protection technique. Insurance is appropriate if the loss will cause you or your loved ones a significant financial loss or inconvenience. Do keep in mind that in some instances, you are required to purchase insurance (i.e. if operating a motor vehicle). For risks that are of low loss severity but high loss frequency, the most suitable method is either retention or reduction because the cost to transfer (or insure) the risk might be expensive. In different words, some damages are so inexpensive that it's worth taking the risk of having to pay for them yourself, instead of forking extra money over to the insurance company every month.
The Risk Management Method
After you've got determined that you would love to insure against a loss, the next step is to hunt insurance coverage. Here you've got several choices obtainable to you, however it's usally best to buy around. you'll go on to the insurance underwriter through an agent, who can bind the policy.The method of binding a policy is just a written acknowledgement distinguishing the most parts of your insurance contract. It's mean to provide temporary insurance protection to the consumer pending a formal policy being issued by the insurance company. It should be noted that agents work exclusively for the insurance company. There are 2 types of agents:
- Captive Agents: Captive agents represent a single insurance firm and are needed to solely do business with that one company.
- Freelance Agent: Freelance agents represent multiple companies and work on behalf of the client (not the insurance company) to search out the foremost acceptable policy.
Underwriting
Underwriting is the method of evaluating the risk to be insured. This is done by the insurer when deciding how probably it is that the loss will occur, how much the loss could be and then using this information to determine how much you should pay to insure against the risk.The underwriting process will enable the insurer to determine what applicants meet their approval standards. For example, an insurance company might only accept applicants that they estimate will have actual loss experiences that are comparable to the expected loss experience factored into the company's premium fees. Depending on the type of insurance product you are buying, the underwriting process may examine your health records, driving history, insurable interest etc.
The concept of "insurable interest" stems from the idea that insurance is meant to protect and compensate for losses for an personal or individuals who may be adversely affected by a specific loss.
Insurance isn't meant to be a profit center for the policy's beneficiary. People are considered to have an insurable interest on their lives, the life of their spouses (possibly domestic partners) and dependents.
Insurance Contract
The insurance contract is a legal document that spells out the coverage, features, conditions and limitations of an insurance policy. It is critical that you read the contract and ask questions if you don't understand the coverage. You don't want to pay for the insurance and then find out that what you thought was covered isn't included.Insurance terminology you should know:
Bound: Once the insurance has been accepted and is in place, it is known as "bound". The process of being bound is called the binding process.
Insurer: An individual or company that accepts the risk of loss and compensates the insured in the event of loss in exchange for a premium or payment. This is usually an insurance company.
Insured: The person or company transferring the risk of loss to a 3rd party through a contractual agreement (insurance policy). This is the person or entity who will be compensated for loss by an insurer under the terms of the insurance contract.
Insurance Rider/Endorsement: An attachment to an insurance policy that alters the policy's coverage or terms.
Insurance Umbrella Policy: When insurance coverage is insufficient, an umbrella policy may be purchased to cover losses above the limit of an underlying policy or policies, such as homeowners and auto insurance. While it applies to losses over the dollar amount in the underlying policies, terms of coverage are sometimes broader than those of underlying policies.
Insurable Interest: In order to insure something or somebody, the insured should provide proof that the loss will have a genuine economic impact in the event the loss occurs. Without an insurable interest, insurers will not cover the loss. It is worth noting that for property insurance policies, an insurable interest must exist during the underwriting process and at the time of loss. However, unlike with property insurance, with life insurance, an insurable interest must exist at the time of purchase only.
That's one of the basic knowledge you should know about insurance(how insurance works), let's us discuss specific types of policies in the next article.
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