Insurance - Armor for the modern knight

Those who are feeling a little uneasy on the context of the somewhat of a riddle presented above, for them, we are talking about an everyday phenomenon – Insurance. The rest; you can relate. But for that, one’s idea on insurance must be spic-and-span.

Insurance: The core facts

According to law and economics, the idea behind insurance is to eliminate (at least reduce) the risk of a contingent loss. That is the simplification of a rather complex definition - The equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium. Insurance is sold in the term of pre-set plans or policies by an organization that we call an insurer. The payments (from the insurance buyer to the insurance companies) vary according to the type of policy people are choosing and are called premiums; these determine the insurance rates – the price for the coverage against calamities life hold. Thus we can term insurance as a type of risk management (the practice of appraising and controlling risks).

Insurance Precepts

Insurances, whether covering commercial risks or the personal ones, have a few properties common in between.

• Homogeneous exposure units: This involves providing insurance policies to the individual members of a very large demographic. The homogeneous exposure units are particularly useful in bringing profits through the Law of Large Numbers (i.e. bulk amounts gathered through the collection of small amounts from a large number of people). There are, however; exceptions; and these are the insurance plans for a definite sector like the celebrities, infrequent events and exceptional properties.
• Definite Loss Coverage: An event responsible for a loss covered by insurance in principle, at a known time and place and from a known cause. An example is the death of an insured person covered by life insurance policy due to some occupational disease.
• Accidental Loss Coverage: Medical insurance, health insurance, home insurance, house insurance, travel insurance etc. falls under this category, in the sense that loss to the specific items must result from an event beyond the control of the insured party.

What profits the insurance companies?

To simply put, it’s the risk limiting features of the policies that bar certain provisions for voiding the contract in exchange for benefit. Thus:

• A policy should not exceed a term of three years unless classified as long-term.
• The contract must include agreements conferring certain rights, obligations and benefits for either or both the parties.
• The contract must not have arbitrary limitations regarding payments.

A look at the insurance business model shall clarify it further.

Profit = (Premium earned + income through investment of the premium amount) – (incurred loss + underwriting* expenses). *Underwriting: A process that enables insurers to select risks for insuring and putting a price to it.

Types of insurance

• Auto insurance or car insurance: Covers typically the risk of theft or damage to a car as well as the liability risks. Car insurance UK is known as automobile insurance.
• Life insurance: It is a monetary benefit to a designated beneficiary, obtained against the death of an insured person.
• Health insurance or Medical insurance: These cover the private medical treatment costs. Dental insurance is also sometimes regarded as a part of it.
• Home insurance or house insurance: Another name for property insurance that pays when a home or a house is damaged because of an accident or a natural calamity.
• Travel insurance: This type covers those who travel abroad in terms of certain losses e.g. medical expense, loss of personal belongings, travel delay and personal liabilities.

There are also a plethora of other types like business insurance and rental insurance and the names signify their area of their coverage. The American insurance companies have all the details registered in their respective websites and whether it’s a group insurance or a cheap car insurance that you’re looking for, you are bound to find a suitable scheme out of the entire available range.