What Is Insurance

What Do you mean by Insurance ?

What is Insurance! in simple words insurance means to insure then incoming risks. Insurance is the option to cover your life and property risks. It is a legal agreement between two parties – the insurer (An entity which provides insurance is known as an insurer ) and the insured (Person or entity covered under the policy is called an insured).

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What is an Insurance Policy ?

Insurance Policy Is legal agreement between two parties – the insurer and the insured. By Reading Policy terms helps you to understand that if any loss occurs then your and the insurance company’s responsibilities. There are many insured purchase a policy without understanding what is covered

To Understand more about Insurance Policy click here.

How Does Insurance Works

what is insurance

Well Insurance is a financial vehicle that help Spread Financial Risk. By taking a risk from an individual, and spreading that risk around a community, the individual is able to go about their personal or business life without crumbling from financial ruin.

let’s take an example to understand Insurance

In simplest terms let’s look at two people. One name is Rahul and the other is Sanjay. Sanjay says to Rahul, I’ll give you ten dollars, but if I lose my cell phone, you’ll have to buy me a new one. If Rahul agrees, then that’s a insurance right there.

Insurance companies make money because they evaluate the risk and decide whether it is worth the gamble.

lets get back to Rahul and Sanjay . Rahul believes that Sanjay probably won’t lose his phone and he’ll therefore be ten dollars richer. If Rahul finds 100 more people who are willing to give him 10 dollars each to cover their phones he has 1,000 dollars. If one of those 100 people loses their phone and Rahul pays 100 dollars as compensation, he still has 900 dollars.

History of Insurance

This Insurance idea has been floating around since the ancient Chinese and the Bablonians spread their shipping risks.

To know more About the History of Insurance click here.

Modern Insurance

In the 17th century in London that modern insurance really took off. Merchant marine men and traders often hung out in coffee shops in the business district of London, and while drinking copious amount of coffee, the idea of modern day Insurance was born.

Lloyds of London, the heart of worldwide Insurance, was developed inside one of this coffee houses.

How Modern Insurance Works ?

First, you have the client (like Sanjay ). Say the client has a ship that he is nervous about losing to pirates offshore, or perhaps the vessel will be destroyed in bad weather. The client approaches an Insurance broker. The broker looks at the ship, or pay someone to look at the ship, and they decide how much the total value of that ship worth. The brokes then assesses the risk.

He asks the client where he is traveling to and what cargo he will be carrying. With all this information, he draws up an insurance policy which he shows to the third person in the chain – the underwriter. For a cheaper premium, the underwriter may exclude a few risks And for a few more dollars, he may include some extra risks.

Now there are normally lots of underwriters approached, but one will be the lead, and the underwriter, like Rahul, will normally take the largest proportion of the risk and sing his name first on the policy document.

He is known as the underwriter, as he writers his name under the risk on the insurance policy. The lead underwriter makes the major decisions when it comes to accepting the policy, and will be the main man to agree to any claims on the policy. Once the terms of policy are agreed to, it is made legal, and the client is happy and the ship sets sail – nut not before paying the insurance premium to the broker, who will take 10% and pass the rest on to the underwriter.

But what should happen if pirates board the ship, steal the cargo, and burn it at sea?

Well, the client will speak to the insurance broker and the broker will visit with the lead underwriter and tell him the bad news. The rest of the underwriter (there may be as many as 50 on big policy) are told the news and then the broker must negotiate the best claim settlement for the client or his representatives. The underwriters pay the money to the broker, who passes it on to the client, without deducting any cut. The broker makes his money once the premium is paid and will negotiate the best claims for his clients through gentlemanly honour and the project of future business.

How Insurance Companies makes Profit ?

Now let’s talk about the profit There’s not only one client. So, Now it may not be all and news for underwriter. If he is Wise and not greedy , he may have reinsured the policy. Reinsurance puts the underwrites in the position of the client. The underwriter sells the policy onto another underwriter or firm of underwriters, while retains a share of the premium. I guess You confused ?

Think back to Rahul and his phone Insurance. If Rahul resold his 10 dollar policy for 9 dollar, rather then 10 he received, then he gets to keep a dollar each of his 100 clients, meaning he has 100 dollars completely risk free.

Similarly, much of the modern day insurance that flows through Lloyds of London is reinsured out of the building to smaller insurance companies all across the world.

So what starts as a Simple agreement between the client and the broker (or rahul and Sanjay ) is spread across a business community who each stand to profit from the premium or take a cut of any losses.

At last this is how Insurance works by spreading of risk over communities.

Types of Insurance

  • Life Insurance
  • Home Insurance
  • Motor Insurance
  • Education Insurance
  • Health Insurance
  • Travel Insurance
  • Crop Insurance
  • Business Liability Insurance
  • Property Insurance
  • Pet Insurance

Here is Some Benefits Of Having Insurance

  • Insurance protect against losses arising from different uncertainties in life.
  • Insurance helps to manage over cash flow.
  • Having a Insurance also helps you to avail income tax benefits.
  • Insurance works on risk transfer mechanism.
  • Insurance also promote economic growth.

Last Words

So, What Do you Think? Do you have Insurance to Protect against the unexpected? Do Insurance Companies Charge Too much? Is it just a scam ? Let us know your Thought in the Comments!

A veteran trader and investor in the cryptocurrency space, this is my personal blog for sharing insights and updates on my trading activities.

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