What You Should Know About Insurance

The equitable transfer of the risk of a loss from one entity to another in exchange for a premium is called Insurance. This can be thought of as a guaranteed a known loss to prevent a larger or a devastating loss. An insurance involved two parties, the insurer and the policy holder.

An insurer is a company selling the insurance. It is the company that takes the risk of whatever damage is incurred in a certain event or whatever happens to a policy holder in any situation. The policy holder is a person or an entity who buys and insurance. He pays an insurance rate to the insurer. An insurance rate is a factor rate used to determine the amount of insurance coverage, which is called the premium. The insurance observes some principles. To mention some are;

1. Insurance has a large number of homogenous exposure units. In this principle the insurance provides a vast majority of insurance policies for individual members of a very large class. A typical example of this is the large number of policy holders working in a certain company, wherein premiums are paid by the employer sometimes, if not premiums are deducted from their salaries.

2. Definite Loss. This principle says that in the event when the death of an insured person occurs, the cause is known, the place where it took place should be definite and also the time of death is known. The report made should state all these so that the insurer can act.

3. Accidental Loss. The insurance has the principle that when an accident happens it should be proven that the said accident was beyond the control of the beneficiary of the insurance. Meaning it happened without any malicious intention.

4. Large Loss. There is a small chance of paying big costs unless protection offered has real value to the owner. The size of the loss must be meaningful to the policy holder. The premium needs to cover both the expected costs of losses and the administering policy.

5. Affordable premium. The premium is not so exorbitant that the person who wishes to purchase the insurance for his protection can afford to pay. Likewise the insurer can also pay what is due to the policy holder in case something happens.

6. Limited risk of catastrophically large loss. The insurance has collective or aggregate risks. The insurer’s ability to issue policies can be constrained or hindered not by factors surrounding the policy holders but by the factors surrounding the sum of all policy holders. Thus the insurer limits their exposure to a loss from a single event. Today, though there a lot of insurance companies that sell various kinds of insurance, the policy holders have always the right to be informed of the policies that they have. A person who wishes to purchase any insurance should be aware of the coverage of the premium that he pays.

The History and Principles of Insurance

Insurance as we know it today could be traced to the Great Fire of London, that in 1666 devoured 13,200 houses. After this disaster Nicholas Barbon opened an office to insure buildings. In 1680 he established England’s 1st fire insurance company, “The Fire Office”, to insure brick and frame homes. The first insurance firm in the United States provided fire insurance was formed in Charles Town (modern day Charleston), South Carolina, in 1732.

In 1752, Benjamin Franklin founded the Philadelphia Aid for the Insurance of Houses from Loss by Fire. It refused to insure some buildings in which the risk of fire was too great, like 100% wooden buildings.

The Principles of Insurance:

The exact time or occurrence of the loss need to be uncertain. The value of losses ought to be relatively unsurprising. In order to determine premiums or in other words to calculate price levels, insurers must be able to estimate them. Insurers require to know the price it would be called upon to pay once the insured event occurs. Most types of insurance have maximal levels of payouts, with several exceptions such as health insurance.

The loss should be significant: The legal principle of De minimis (From Latin:about minimal things) dictates that negligible matters are not covered.The payment paid by the insured to the insurer for assuming the risk is known as the ‘premium’.

Potential causes of chance that may give rise to insurance claims are named “perils”. Examples of perils might be fire, theft, earthquake, hurricane and numbers of additional possible risks. An insurance policy will set out in details which perils are covered by the policy and which are not. The damage must not be a catastrophic in scale, If the insurer is insolvent, it will be unable to pay the insured. In the United States, there are Guaranty Funds to reimburse insured victims whose insurance companies are bankrupt. This program is managed by the National Association of Insurance Commissioners (NAIC).

Indemnification (compensation)

Anyone wishing to transport risk (an individual, corporation, or organization of any type) becomes the ‘insured’ party once risk is assumed by an ‘insurer’, the insuring party, by means of a contract, defined as an insurance ‘policy’. This legal agreement sets out terms specifying the total of coverage (reimbursement) to be rendered to the insured, by the insurer upon assumption of risk, in the event of a loss, and 100% the specific perils covered against (indemnified), for the duration of the contract.

When insured parties experience a loss, for a specified peril, the coverage allows the policyholder to produce a ‘claim’ against the insurer for the amount of damage when specified by the policy contract.

Financial viability of insurance companies

Financial stability and posture of the insurance company need to be a major factor When purchasing an insurance contract. An insurance premium paid currently provides coverage for damges which can arise few years in the future. Due to that, the financial strength of the insurance carrier is most significant. In the past few years, a few of insurance companies became unable to pay, neglecting their policyholders with out coverage (or coverage merely from a government backed insurance pool with less the Priciples and History of InsuranceS-favorable payouts for losses). A number of independent rating agencies, like Best’s, provide facts and rate the financial strength of insurance firms.

Risks Assessment

The insurer uses actuarial science to quantify the risk they are prepared to consider. Information is gathered to approximate future insurance claims, ordinarily with reasonable accuracy. Actuarial science employs statistics and probability to analyze the risks associated with the range of perils covered, and these scientific principles are utilized by insurers, in combination with other factors, to decide rate composition.

The Gambling Analogy

Certain people erroneously assume insurance a type of wager (particularly as associated with moral hazard) which executes over the policy period of time. The insurance company bets that you or your property will not suffer a damage while you put money on the opposite outcome. Virtually all house owner’s insurance does not cover floods. Using insurance, you are managing risk that you may not otherwise prevent, and that does not lend itself the chance of benefit (pure risk). In other words, gambling isn’t an insurable risk.

The “insurance” of Social Solidarity

A few of religious groups among them the Amish and Muslims refrain from insurance and instead depend on support provided by their society when disasters strike. This could be thought of as “social insurance”, as the risk of any given person is assumed collectively by the community who will completely bear the cost of reconstruction. In closed, mutual help communities in which other people might actually step in to rebuild total lost property, this arrangement could function. The majority of societies could not effectively support this type of models and it will not function for catastrophic risks.
(Source: http://en.wikipedia.org/wiki/Insurance).