Fundamentals of insurance is an excellent introduction to the subject for people who’ve recently become involved in their company’s insurance program or simply want to refresh their knowledge. In this read, we are going to look at the basics of insurance, including what it is, the benefits, policies, risks, claims, etc.
What is Insurance?
Simply put, insurance is a promise made by an insurer (insurance provider) to the insured to compensate against financial losses. In exchange, the insured makes periodic payments, often referred to as premiums.
Reasons to Buy Insurance
There are many benefits of purchasing insurance, but the most important is to ascertain safety against substantial financial losses that you may incur in the future. Also, insurance helps financial planning and provides the insured with tax benefits.
What is a Risk
A risk in insurance is the consequential damage or loss of assets, making them non-functional before their anticipated lifetime or complete destruction of the assets. Risk simply means that there’s a chance of damage or loss and may or may not occur. An insurance company covers these risks if they occur.
The term possibility means uncertainty, but it has great relevance in the insurance world, which only applies in cases where there’s an amount of predictability and uncertainty.
Types of Risks
Insurance just covers the substantial financial losses sustained as a result of catastrophic or critical risks that are purely speculative. Perils that come about due to accidents, natural disasters, illnesses, and breakdowns and happen to be static in nature are some of the risks covered by insurance companies.
For a risk to be acknowledged or covered, it should have the following characteristics:
-It should occur by chance
-Have a predictable loss rate
-Should be definite in terms of amount and time
-The loss shouldn’t be catastrophic to the insurer
-The losses sustained should have a substantial value
Contracts in Insurance
A contract can be defined as a legally enforceable agreement between two or multiple parties. The most common types of contracts include:
1.Contract of Indemnity- Here, the benefit is based on the financial losses sustained, e.g. property, liability, health, etc.
2. Bilateral Contract- Here, the involved parties make promises that are legally enforceable eg. marriages.
3. Valued Contract- Here, the benefit is mentioned in the contract, an example being life insurance.
4. Unilateral Contract- In this type of contract, just one of the involved parties makes legally enforceable promises.
5. Bargaining Contract- In this contract, the involved parties specify the terms and conditions of the contract in advance but reserve the right to reject or accept the same.
Claims
A claim is a formal request from the insured to the insurer asking for compensation for a covered risk or policy event. When you make a claim, the insurance company plays its part to ensure that the terms and conditions in your contract have been complied with. The assessment process entails:
-Making sure the event has actually happened
-The obligations to compensate as per the contract are complied with
-The party asking for compensation are eligible to do so.
Types of Claims in Insurance
1. Burglary & Theft
These are the most common types of claims in the commercial space. They can include damage to a business’ property during a break-in and also the actual theft of equipment and possessions.
2. Fire
This is a major threat to businesses and property, making it a common type of insurance claim. You can file claims to cover substantial losses related to fire, including repairing, rebuilding establishments, and even replacing the damaged supplies and equipment.
3. Product Liability
If you manufacture or sell a faulty product, you might be held liable for any related illnesses or injuries that the customer sustains. This type of claim is common in the manufacturing, distribution, and retail industries. Without the right coverage, your company can be held liable for legal fees, lost wages, medical expenses, as well as the cost of recalling the product.
4. Auto Accidents
An auto accident involving either a commercial or a personal vehicle is a reason for an insurance claim when there is injury, vehicle damage, or property damage. An auto insurance policy helps protect you or your business against the costs that come with such accidents.
Of course, these are just but a few examples of the many claims in the insurance industry. Hopefully, with the examples and explanations of the fundamentals of insurance, you will have a better grasp of the subject and know what to expect when shopping for a policy.