Insurance is something that every responsible adult should have in 2023. It is a safety net that protects you from the risks of life, whether it is an accident, illness, or death. It is important to understand the principles that make insurance work so that you can make informed decisions about the type of coverage that you need.
The primary principle of insurance is risk transfer. This means that instead of having to pay the full cost of a loss or damage out of pocket, you can transfer the risk to an insurance company. The insurance company then assumes the risk and is responsible for paying out the claim in the event of a loss.
Sharing of Risk
The second principle of insurance is sharing of risk. This means that instead of everyone having to pay the full cost of a loss or damage out of pocket, the cost is spread out among many people. This is done by grouping people into pools of risk, such as those who buy the same kind of insurance, and then the cost of the claims is divided among the members of the group.
Insurance as a Contract
The third principle of insurance is that it is a contract between the insured and the insurer. This means that both parties agree to certain terms and conditions, such as the type of coverage, the amount of premium to be paid, and the responsibilities of each party.
The fourth principle of insurance is that premiums must be paid in order for the coverage to be in effect. This money is used to pay for the cost of the claims and the administrative costs of the insurance company. The amount of the premium is determined by the type of coverage and the amount of risk the insurance company is taking on.
The fifth principle of insurance is reinsurance. This means that the insurance company can transfer some or all of the risk to another insurance company. This is done to spread out the risk and to reduce the financial burden on the original insurance company if the claims are too high.
The sixth principle of insurance is subrogation. This means that the insurance company can pursue a claim against a third party who is responsible for the loss or damage. This helps to reduce the costs associated with the claim and ensures that the insurance company does not have to pay out the full amount of the claim.
The seventh principle of insurance is indemnification. This means that the insurance company can pay out a claim to the insured even if the insured is found to be partially at fault for the loss or damage. This is to ensure that the insured is not left out of pocket and is able to make a full recovery.
The eighth principle of insurance is insurable interest. This means that the insured must have a financial interest in the property that is being insured for the insurance to be valid. This is to prevent people from taking out insurance on property that they do not own and do not have an interest in.
Utmost Good Faith
The ninth principle of insurance is utmost good faith. This means that both parties to the insurance contract must act in good faith and disclose all material information that is relevant to the contract. This helps to ensure that the insurance company is not taken advantage of and that the insured is not misled about the coverage provided.
These are the nine principles that make insurance work in 2023. It is important to understand these principles so that you can make informed decisions about the type of coverage that you need to protect yourself and your family from the risks of life.