Overview of Insurance Policies
Insurance is a form of risk management which provides a safety net against a catastrophic loss to the insured.
In order to provide insurance coverage, there must be a sufficiently large group of like users so that the expected probability of a negative event becomes statistically significant. An example is automobile insurance. Nearly 180 million automobiles are covered under automobile insurance policies in the United States alone. Given this fact, the insurance company is able to look at statistical modeling and probability calculations to determine what the likelihood of an accident happening to an automobile belonging to the insured.
Another principle of insurance policies is that they should be purchased on the basis of a particular known loss. For example, you would not purchase insurance that would reimburse you for loss if you had anything negative happen to you in the next year. The insurance policy instead would reduce the risk of catastrophic loss for an automobile accident, a house fire or medical emergency.
The next principle of an insurance policy is that the loss suffered must be outside the control of the insured. In other words, a building owner who was convicted of setting fire to his building could not receive reimbursement for the losses suffered in the fire.
The loss suffered to the insured must be significant. The cost of paying out numerous smaller claims, due to the administrative costs involved in handling the claim, accepting and recording premiums and other costs, could be greater than for a single large claim. For this reason, the insurance company usually has a deductible amount, below which they will not pay.
The premium must be low enough to be affordable to the insured. If the premiums are high enough that the object or condition insured is less than the cost of the premiums, what would be the point of the insurance?
The insured must be able to calculate from the information presented in the policy what the risk and cost of the insurance actually is. Overly muddy and confusing language, circular clauses, hidden outs are all prohibited.
Finally, there must be a method by which the insurer can be protected against losses which would be devastated. It is not just the company itself, but the millions of shareholders and other policy holders which are being protected. Insurance company pools or underwriters are usually those who cover the risk attendant upon wind damage in a hurricane zone for example.
by Nathan.Smarty 19 years ago