Insurance is a very common term – so common in fact – that nearly everyone has heard it before. However, very few people really understand what insurance is and how it works. So, how does an insurance work? It might be too much to take it all in at once though. Let’s have a closer look at insurance companies and their inner workings. The constant propulsion of asset prices, such as vehicles and houses, creates an increasing demand for a way to insure the financial safety for the person making these investments. The insurance companies capitalize on this by providing that much needed safety blanket. This would be a lot easier to understand if you think of it as a risk game, as a gamble. The insurance companies gamble on the safety of the insurance policy holder. If something devastating happens, the company suffers the financial loss on behalf of the person insured, as promised. If nothing happens, the company makes a healthy profit.
The operating model for insurance
The idea behind providing insurance is an ingenious one; more often than not, the company profits from its policy holders. How so? Think about the risk you take when you drive your car or the risk to your house from a typhoon. There’s no guarantee what will happen. That’s just a risk, which can turn out badly sometimes, and goes smoothly most of the time. The negative chance is always lower than the positive. This way, the company providing the insurance is able to collect enough money to compensate the few people who suffer damage or loss. Even if the amount claimed is dramatically higher than the amount paid by that person, the company will have collected money from others who are fortunate enough not to have to make a claim. It is very rare that a multitude of bad luck will rain down on the policy-holders of one insurance company all at one time, and if indeed this happens, the company may be bankrupted by it.
Are policy holders cash cows?
Thinking of insurance this way, it’s quite easy to understand that the policy holders may be in a disadvantaged position. It’s a thought-provoking concept, mostly because these are large companies we’re talking about. However, this isn’t true in most cases. Insurance providers are businesses too, no matter how you perceive them. The companies have maintenance cost and various other expenses. The workers need to be compensated and the administrators and stockholders get their share.
At the end of the day, it’s still a company and has to make profit. That doesn’t mean that you, being the policy holder, are being ripped off. There is a need for the insurance, and the company simply fulfills that need, in a way that is common to all businesses: profiteering. It doesn’t mean it’s bad.
You can try to avoid risks as much as possible. Sometimes though, the risks can catch you off guard. You might be looking the other way when the hurricane came and tore your building in half. Not that you could’ve done anything about it. This is an example where the conditions of the insurance policy are met : something that can’t be helped. Something you didn’t cause, but caused you damage, nonetheless. A fire, theft, or earthquake can also qualify you for an insurance claim, depending on your policy.
The items of value covered will most likely be the life of the person, the property, the vehicle, and the items of value inside the residence. The coverage will depend on the type of insurance the policy holder has. For example, term life insurance won’t apply for car theft, unless both insurances are explicitly defined in the fine print of your policy. The combination of two or more insurance types often results to a custom policy. Premium and custom policies will be more expensive, but will cover much more than regular insurance. Be sure to decide wisely when looking for an insurance policy.