InsuranceSite.org - Understanding how Insurance works

Introduction Insurance represents a monetary form of managing risk that can cover a variety of assets or a given behavior. For instance, actors insure their looks and bodies in case they get injured while working which could then cost them time and ability to get new acting jobs (i.e. loss of income). Businesses insure financial investments in case they go south and turn into a total loss of principal funds invested. For insurance to work and be effective it requires: 1) an agreement between the parties spelling out exactly what is covered and what is not, 2) an exchange of consideration which typically involves a fee in exchange for financial coverage of risk during a limited time period, and 3) and means for the insurer to spread the accepted risk and not go bankrupt (which then makes the insurance policy worthless to the holder/consumer). However, insurers don't simply hang out a shingle and blindly accept any and all risks that come to the store. They pick and choose those consumer or business risks that are manageable as a group and can still overall provide a profit to the insurer. Insurance providers do this by accepting a large pool of clients and charging each of them varying fees based on the same set of risk rules. In doing so, when a small percentage of the pool submits claims for coverage, the fee revenue from everyone in total can not only offset the cost of the claims but still provides the insurer net profit after the coverage periods have ended. To ensure that the pool of coverage remains profitable, insurers use a number of statistical tools and actuarial services to determine risk breakpoints in various types of coverage and behavior. For instance, automobile coverage will look at factors such as the type of car, age of the driver, number of past tickets and accidents, location, state rules and laws, the insurer's own past performance covering auto drivers, what the competition charges for similar coverage, and pending changes coming in the near future that would affect the provider. All of these factors then get relabeled with a monetary value and when combined build the rate tables charged to a client. While it sounds simple, a large amount of data gets accumulated and compiled regularly to build each distinct rate in an insurance rate table used. Risk and the cost of insurance for the client are then modified by how much coverage the party wants. If they are willing to take on a sizable deductible (i.e. a portion of the risk is self-assumed) then an insurer can lower a policy price charged. If the client's preference only uses the insurance for catastrophic purposes and not annoyances, then the cost can go down further. The key point to remember about insurance is that it's negotiable. There is no set-in-stone cost or rate for a specific insurance policy, and many times the same type of coverage can vary by hundreds of dollars per period between two individuals with the same risk, same factors, and same preferences for coverage. This principle applies to all types of insurance, with the more common types discussed in more detail on the following pages. Insurance contract

Insurance Site .org Auto, Home, Life, Health, Business - How Insurance Works