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Wednesday, 11 February 2015


Life is full of risks – some are preventable or can at least be minimized, some are avoidable and some are completely unforeseeable. What is important to know about risk when thinking about protection is the type of risk, the effect and impact of that risk, the cost of the risk and what you can do to mitigate the risk.

Different types of risk abound, because life itself is a risk. Unfortunately, many people do not know what to do to mitigate these risks. If living is a risk, then every human being is expected to carry one form of protection or another. One can then confidently say that “if risk is like a smouldering coal that may spark a fire at any moment, then insurance is our fire extinguisher”.

So many people have attempted to define or explain insurance, but the simplest definition describes insurance as 'a form of risk management in which the insured transfers the cost of potential loss to another entity in exchange for monetary consideration known as the premium'. In other words, insurance allows individuals, businesses and other entities to protect themselves against significant potential losses and financial hardship by transferring such risks to a third party at a reasonably affordable rate.

Fundamentals of Insurance

The fundamentals of insurance revolve around pooling risks. This is to say that a large group of people who want to insure against a particular loss pay their premiums into what we can call an insurance bucket. Because it is expected that the number of the insured individuals is large, the insurance company can use statistical analysis to project what their actual losses will be within the given class. It is safe to assume that not all insured individuals will suffer losses at the same time or at all. This allows the insurance company to operate profitably and at the same time pay all claims that may arise.

The Risk Management Process

After an individual has determined that he would like to insure against a loss, the next step is to seek out insurance coverage. There are many options available to the individual but it's always best to shop around. One can go to the insurer directly through a company salesperson or sales outlet or indirectly via an intermediary such as an agent or broker, who can bind the policy.

The process of binding a policy is simply that of writing an acknowledgement identifying the main components of the insurance contract. It is intended to provide temporary insurance protection to the consumer pending a formal policy being issued by the insurance company. It should be noted that an agent could work exclusively for one insurance company or be a representative of the insured.

There are two types of agent:
1. Captive Agent: Captive Agents represent a single insurance company and are required to sell products/policies only on behalf of that one company.
2. Independent Agent: Independent Agents represent multiple companies and work on behalf of the client (not the insurance company) to find the most appropriate policy.

An individual can also purchase an insurance product from a broking firm, even though brokers are skilled intermediaries more geared towards rendering services to large, small and medium scale enterprises rather than individuals.

Underwriting is the process of evaluating the risk to be insured. This is done by the insurer when determining how likely it is that the loss will occur and how much the loss could be, and then using this information to determine how much the consumer should pay to insure against the risk. The underwriting process will enable the insurer to determine which applicants meet their approval standards. For example, an insurance company might only accept applicants that they estimate will have actual loss experiences that are comparable to the expected loss experience factored into the company's premium amount. Depending on the type of insurance product you are buying, the underwriting process may examine your health records, driving history, insurable interest, etc.

The concept of 'insurable interest' stems from the idea that insurance is meant to protect and compensate for losses an individual or individuals who may be adversely affected by a specific loss. Insurance is not meant to be a profit centre for the policy's beneficiary. People are considered to have an insurable interest on their lives, the lives of their spouses (possibly domestic partners) and other dependants. Business partners may also have an insurable interest on each other and businesses can have an insurable interest on the lives of their employees, especially key employees.

For insurable interest to exist, there must be a legally recognized and enforceable relationship with either an individual, a physical asset/item or an activity or event for which a negative financial outcome could arise in the occurrence of an event or series of events.

Insurance Contract

The insurance contract is a legal document that spells out the coverage, features, conditions and limitations of an insurance policy. It is critical that you read the contract and ask questions if you don't understand the coverage. You don't want to pay for the insurance policies and then find out that what you thought was covered isn't included.

Different Types of Insurance
There are some salient facts to note whilst buying an insurance policy. First, a consumer should understand that an insurance policy is a contract issued between the insurance company and the insured. Second, this contract provides that the insurance company will reimburse the insured in the case of loss or peril suffered; in return, the insured will pay premiums steadily, monthly or yearly as agreed, to the insurance company.

Third, the type of insurance must be listed in the insurance policy. Fourth, the insurance policy only covers the damages or losses which are more than the amount of the deductible or excess amount; every insured is required to bear a first proportion of every insurance contract, usually a fraction of the total value at risk. Last, this contract also has to include the value of the insured item and the insurance premiums.

Focus on Six Different Types of Insurance
Motor Insurance: Under the policies of motor insurance, coverage is provided for any damage caused by accidents (to the third party at least). The insured needs to pay the premium either on a one off annual basis or on a period basis (i.e. monthly or quarterly) to the insurer, who in turn provides compensation to the insured in the case of accidents and mishaps. There are three types of automobile insurance coverage – liability coverage to third parties, physical damage coverage to one's vehicle, and theft of vehicle or damage as a result of attempted theft. You can choose which coverage you want but the liability coverage is minimum compulsory cover by law.

Life Insurance: Life insurance is a plan which provides protection to the insured and his family with financial coverage in the case of death. To avail the benefits of a life insurance policy, the policy holder has to pay a premium to the insurer for a certain period of time. Benefits payable under a life policy can be specifically channeled towards events such as a child's education, taking out a mortgage, taking out loans, burial expenses, general living expenses, etc.

Health Insurance: Under this type of cover, medical expenses are covered. When an insured person needs medical treatment due to illness or accident, the insurance company provides coverage for his expenses, such as doctor fees, hospital fees, cost of medications and other related management bills.

Home Insurance:
Home insurance provides compensation for any mishap that occurs to your home. Coverage is provided according to the policy and premium paid by the homeowner. There are various types of home insurance plan that you can choose from to suit your needs. You can cover either the property or its content or both, while cover can be arranged against fire damage, theft/burglary, flood water damage, wind storm damage, etc.

Disability Insurance: Disability insurance is the financial coverage provided to an individual when he loses his ability to work due to any illness or accident. There are two types of disability policy: Short Term Disability (STD) and Long Term Disability (LTD). In Short Term Disability, compensation is provided for a period usually subject to a maximum of two years. On the other hand, if you buy the Long Term Disability plan, you can get benefits for the rest of your life. Disability is defined as one's inability to make or earn a living according to a trade or skill learned or acquired over time such that cover purchased is against projected earnings over the short or long term period.

Business Insurance: If you have a business organization, be it small or big, you should always opt for business insurance policies to protect it from different risks. Under business insurance, you can buy policies that provide coverage for business property and liability. The most popular business insurance policy that is purchased by various business concerns is BOP (Business Owners' policy). BOP is a combined package that provides coverage for property insurance, business interruption insurance and liability protection. You could also buy each of these covers separately.

Given the fact that we face different risks daily, insurance represents a simple and cheap way to transfer these risks to specialized and licensed companies who have capacity and skills to indemnify you against losses. Therefore, it is not just important to protect yourself with insurance products, it is equally important to make your purchases from the right insurers.

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