Insurance


The Risks Which An Insurance Policy Covers

Insurance is a risk-management system that is used to protect a person or entity from contingent loss. It is simply a transfer to another entity of the risk of loss in return for a premium.

The insurance industry can be divided into 2 groups, namely: life insurance and non-life insurance. Life insurance companies sell life insurance, pensions and annuities products. On the other hand, non-life insurance, also known as General or Property/Casualty Insurance companies sell other types. The following are 7 common characteristics of commercially insurable risks:

• Large Classes. Usually, insurance is taken for a large homogeneous number of classes. For instance, there is the so-called automobile insurance which in 2004 covered approximately 175 million automobiles in the US. However, there are also exceptional insurance policies that insure famous personalities’ life or health.

• Definite Losses. A known time, place, and cause gives rise to an insured’s loss. Thus, in the life insurance policy of worker, the death is a known cause. While there are occupational diseases where prolonged exposure may not necessarily identify the time, place or cause specifically, sufficient information should be gathered to convince a reasonable person that the three elements are present.

• Accidental Losses. The event that triggers a claim must be outside the beneficiary’s control. Generally, the fortuitous nature of insurance does not include speculative elements like ordinary business risks.

• Large Losses. The loss sustained must be large enough to be considered meaningful to the insured’s point of view. There is no point in paying other costs in the issuance of the policy if the protection offered does not matter much to the buyer.

• Affordable Premiums. It is very unlikely for anyone to buy insurance policies that are so expensive that it becomes grossly disproportionate to the event or risk insured against. Accounting principles agree to the fact that premiums should not be so large as to eliminate any reasonable chance of loss on the part of the insurer. Such a unique case might only be insurance in form alone.

• Calculable Losses. Probability of loss and the cost thereof must be estimable, at least. Probability of loss can be estimated based on years of experience. On the other hand, cost is determined based on proofs of losses that are objectively evaluated.

• Limited Risk. Aggregation is often considered as an essential risk. If an insurer has numerous policyholders who share a loss due to the very same event, this can constrict the insurer’s ability to issue policies. Thus, insurers typically prefer to put a ceiling in their exposure to losses based on a single event to a mere 5% of their capital base. Otherwise, a catastrophic event would restrict an insurer from having additional policy holders. This is true with earthquake insurance and wind insurance for those in seismic and hurricane zones respectively. Extreme cases could have a dire impact on the plight of the entire insurance industry since the capital of insurers might be disproportionate to potential policyholders’ needs.

For sure, you may have encountered a risk that you might want to be protected against. If you do not have insurance just yet, it’s never too late. You can start by getting free online insurance quotes and advice from insurance companies’ website to guide you on where and how to start protecting yourself.