To put it simply, insurance is a risk
management tool and it works on the premise of risk pooling. When a person buys
an insurance policy, he has to pay an amount called premium decided on the
basis of the policy bought, on predefined intervals. These amounts go towards
filling his insurance bucket. Insurance companies apply statistical tools to
project the number of claims that can come to them at any given time in a
particular class. Since, all insured individuals will not necessarily face
difficult situations and in fact, they will never face it at the same time. It
gives the insurance company the possibility to function profitably and settle
claims that may arise from time to time.
Life
is full of Risks
When buying an insurance policy, you always
have to consider the enormity of risk involved.
While some risks can be avoided or minimized,
some might be unavoidable or completely unexpected. When considering these
risks, we should take into account the type, effect, cost and ways to minimize
the risk.
Say, when we talk about the life insurance of
a lone earning member of the family. If something untoward happens to him, how
could you mitigate the financial burden that would come upon the other family
members? Well, that’s where life insurance comes into picture. If that person
have invested in a life insurance policy, the risk of transferred to the
insurance company and it has to step in to help the family in the difficult
times.
Let’s delve a little deeper into this idea of
risk management. For risks that are outside your control, it is better to
transfer it all together and for risk that can be avoided or reduced; you
should take into account the cost of risk transfer and the value you would get
upon transferring that risk. If the value you get after transferring the risk
is greater than the loss, then insurance makes sense.
The
Risk Management Process
If you have decided to buy an insurance policy
to insure against a loss, then the next step would be to find the best one from
all the available options. Shop around and check out policies by different companies.
You can buy insurance policies from agents who work for these insurance
companies. Agents can be captive or independent. Captive agents are those who
work for a particular insurance company while independent agents are those who
represent multiple companies. Once you have decided on an insurance policy the
agent can bind the policy, which acts as a temporary insurance protection until
a formal one reaches you from the company itself.
Underwriting
The process of determining the value of the
risk to be insured is called underwriting. This is done to determine the
probability and enormity of the occurrence of the loss and on the basis of it
premiums are decided. The concept of insurance is to mitigate the risk involved
rather than to be a profit center for the policy holder and hence the process
of underwriting is very crucial. It may take into account several factors like
your health, driving records, your tax returns, etc.
Insurance
Contract
This is perhaps the most important document as
it is the legal document that is the evidence of your purchase of the policy.
It outlines all the terms and conditions, limitations, features and area of
coverage. It is very important for you to read it thoroughly as it will define
all the area that are covered and the ones that are not.
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