But how can insurers provide this compensation – especially when they know there are so many fires, accidents, thefts, injuries and other losses each day? The answer, strangely, lies in that very fact. Insurers can predict with some certainty how many incidents there will be. They do not know exactly but, based on their long experience of dealing with risk, they have a very good idea. More important, they know it is not everyone who is going to suffer.
In fact, only a few people actually suffer as a result of some risk. Think for a moment of the street where you live. How many fires can you remember recently in the houses around you? It is really not all that likely that your house will catch fire, that your car will be in an accident, that you will be injured at work. Nevertheless, if it did happen, it could be a disaster for you.
The insurance company is able to offer you the protection it does by grouping together a large number of people who all feel exposed to the same form of risk. This could be fire, theft, accident or any other risk we have either mentioned or will look at later.
The company gathers these people together knowing that in any one year very few in the group will actually suffer any loss. By collecting an amount of money from each person in the group, it then can accumulate a fund – an amount of money, out of which the losses suffered by the few who become victims can be paid.
This seems fine but why not just put the money in the bank instead of paying it to an insurance company, and wait for the day the loss might happen? Think about it! If you own a £100,000 house, a £15,000 car, a £30 million ship, how much will you put in the bank? You just do not know when the risk will happen, and it is unlikely you could put away enough money for such an occurrence.
The money paid to an insurance company (it is called the premium) is a very, very small amount in relation to the value of a house, car or ship. The only reason the insurance company requires such a relatively low premium is because they have gathered premiums from a large number of people, most of whom will not suffer a loss – at least not in the same year as you.
The premiums paid by all the people who seek protection go towards paying for the losses of the few who actually suffer. This does not mean that if you did not suffer at the hands of some risk, you have paid your money for nothing. You had the security, you had the peace of mind all through the year and, if anything had happened, you would have been financially protected.
This introduction to insurance has been adapted from sections 1 to 4 of Insurance: a brief guide. The original work was written by Professor Gordon Dickson and Dr Bill Stein and is published by the Chartered Insurance Institute.
There are many benefits of insurance. Therefore, depending upon the type of insurance, one can easily secure his or her life from risks.
1 comment:
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