Key takeaway: Insurance introduction.

Insurance is a method of risk transfer. It is a legitimate system where you may secure yourself against financial losses that may be unforeseen and unexpected. If you lack the means to meet your unexpected liabilities, then you should seek insurance that would cover you against such unexpected perils. It is not for free; you must pay a small amount to secure yourself. But don’t worry, it is safe because it is a regulated industry throughout the world.

What is Risk? How do we transfer it?

Key takeaway: Financial and pure risk, and how to transfer it.

Risk is the chance of loss. Loss can be in multiple spheres of life. It is the financial losses that one can secure against using Insurance. When we gamble there is always a chance of either profit or loss. The risk here is unforeseen but since there exists a chance of profit the risk cannot be termed a pure loss situation. Pure loss situations are like natural events such as storms, lightning, subsidence, and accidental events such as the escape of water at home, motor vehicle collisions, etc. When these pure loss events take place, one suffers financial losses. But one can mitigate these losses by having an agreement with an insurer. The insurer promises to cover against certain named perils. Thus, when these pure loss events happen, the insurer will indemnify you for the lost money, or pay your liabilities. Hence, your risk is transferred.

What can you Insure? Who can take Insurance?

Key takeaway: Insurance is financial security for individuals and businesses.

Insurance is a mechanism of providing security against financial loss due to certain perils. Simply put, insurance is your security plan for any legitimate venture where a chance of financial loss exists such as your property and assets, your business, your potential liabilities, etc. Insurance products are for individuals as well as businesses. In fact, insurers take insurance to mitigate their risk which they have taken over from the market in exchange for premiums, it is called reinsurance. And reinsurers insure themselves with other reinsurers from diverse economies and through market-linked securities. It is a network that channelizes risk transfer globally and prevents instability and provides the confidence to venture. These ventures help individuals and economies to develop and prosper.

How does insurance work?

Key takeaway: Understand the mechanism and model

1. Insurance requires funds – lots of liquid money because it is the business of securing ventures with quick and immediate effect. 
2. Funds can be capital investments, collected or pooled for a common purpose. For example, everyone who fears motor accidents, fire accidents, theft, business interruption, etc. can pool money towards a fund. Any member suffering a legitimate loss can be provided money out of the fund to cover the financial loss.
3. There should be someone responsible to manage these funds, investing them safely to get guaranteed returns, safeguarding them from fraudulent activities.
4. There should be someone responsible to evaluate the chances of loss that members can suffer in each period so that funds can be pooled accordingly. High frequency and severity of loss would require more funds and vice versa. Their reports become important in deciding on acceptance or rejection of risks. 
5. There should be someone responsible to assess the loss and pay the claim diligently and quickly, fulfilling the purpose of the pooled fund.
6. Then there are people who validate the facts through surveying and assessing the loss. While some help in settlements of disputes over claims and policy terms and conditions such as loss assessors and adjusters, surveyors, lawyers, mediators, etc.
7. When all these parts above are decentralized then you need a network to communicate. Agents and brokers are those networks that represent the insurers, reinsurers, and policyholders.
8. Lastly, there are bodies responsible for monitoring, regulating, and safeguarding the interests of every stakeholder such as Statutory bodies: FCA, PRA, IRDA; Courts, Ombudsman, and Tribunals established through legislation.   

The stakeholders and the Network

Key Takeaway: People Involved

How does it work?

Key takeaway: Insurance contract

It is essentially a contract that has two parties :

• An insurer/risk bearer and,
• The insured whose risk has been borne.

The insurer promises the insured to make good (indemnify/reinstate/compensate/pay) the damages upon the occurrence of the event that causes the loss in return for a small periodic payment known as a premium. A contract of insurance is a promise with terms and conditions. Certain principles set it apart from other contracts such as the duty of fair presentation and having an insurable interest. To understand the insurance contract in detail, read my article on it.

For example, a motor insurance policy promises to compensate the insured for accidental damages to the vehicle, third party, and personal injury thereby covering the financial liability and expenses of the insured after the accidental event. However, it is required that the insured driving the vehicle held a valid license and the vehicle was in a good condition of repair at the time of the incident.

There are acts that govern these contracts of insurance such as The Marine Insurance Act 1906, The Insurance Act 2015, Consumer Insurance (Disclosure and Representations) Act 2012, Financial Services and Markets Act 2000. There are precedents and practices which provide the framework and fill the gaps. While this article shows you a glimpse of insurance, there is a lot more to know such as types of insurance, claim process, and so on. Stay tuned.