Insurance

What is insurance: Insurance is the transfer of risk from an entity to another for payment. The insuring entity receives payment and in turn covers the risk and in case it does occur they will compensate the insured or policyholder. The insuring entity sells the policy while the insured is one who buys the policy at a premium mostly paid monthly depending on the terms of the insurance policy or contract.

Insurance works under the principle of pooling. The premiums paid by the different insured parties are gathered together (pooling) and incase some of the insured suffers losses they are compensated from the pool as agreed. An insurable risk has to fall within certain characteristics of insurability. These can be outlined as follows:-

Substantially extensive loss: according to the insured the loss they are at risk of suffering should be considerably large.

Accidental loss: The loss has to occur beyond the insured’s control. The events leading to the loss should be free from speculative elements.

Affordability: The premiums should be affordable by the insured or else the insurance won’t sell. The price on the premium should match the amount of risk.

Similar risks: The insurer will require that there are a substantial number of similar risks to be covered to adequately take advantage of the pooling principle.

Definite loss: The occurrence of the risk should have a known cause, happen in a known place and at a known time. These should be verifiable in most risks covered by the insurer.

Calculable loss: The loss must be estimable when the insured presents a claim as per the insurance policy. The claim to be compensated should have a calculable value.

Limited risk of catastrophically large losses: The losses should not happen spontaneously and should not be capable of bankrupting the insurer. 

Legal principles

Indemnity- the insurance company agrees to compensate the policy holder in case the loss occurs as agreed.

Utmost good faith- facts should be disclosed by both the insured and insurer “no cards under the table” the insurance should be guided by openness, fairness and honesty.

Insurable interest- the insured should have direct link with the loss.

Contribution- all insurers who are similarly responsible for the insured should contribute towards the compensation of the loss.

Proximate cause- the cause of the loss should arise from a factor covered in the policy.

Subrogation- The insurer takes up legal obligations to follow up on recoveries for the insured. This gives the insurer the ability to seek legal redress to recover the loss suffered by the insured from the party that caused or was liable for it.

Mitigation- This is the handling of the loss by the insured where they are required to try and keep the loss to a minimum and not to fuel it further.

Insurance business model

Insurance firms make money from two distinct features these are underwriting and investing.

Underwriting: involves the selection of risks and pricing of the premiums. When the policy is sold to the insured the money obtained incase no claims arise is considered profit.

Investing: where the premiums collected minus the claims are invested in other fields for example real estate to continue earning the insurance firm an alternative revenue stream.

Health insurance and dental insurance

Health insurance covers the risk of medical expenses. This form of insurance is in some countries charged as a deduction from an individual’s income the fund ensures that people have access to health care. The funds in this case are controlled by a national authority. Insurance companies also offer customized private health plans attracting a monthly premium charged by the insurance companies. The health cover includes certain terms that are best explained such as deductibles, coinsurance and exclusions, out of pocket maxima, co-payment, capitation, in-Network provider, coverage limits, prior authorization and explanation of benefits. 

·         Deductibles, an amount paid by the insured before the insurance company begins to pay its share.

·         Coinsurance, this is a percentage of the total insurance paid by the insured.

·         Exclusions, these are medical services not covered by the policy.

·         Out-of-pocket maxima, this applies when the insured reaches the maximum amount that they can pay out of their pocket where the insurance takes up the payments.

·         Co-payment, the amount payable by the insured before the insurer takes up payment.

·         Capitation, this is an amount paid to a health facility by the insurer beforehand to cover all insured members.

·         In-network provider, where and insurer refers the insured member to a specific health care provider in their network while offering discounted rates on their services as benefits of the insured member.

·         Coverage limit, insurance covers a payment up to a specific amount before the insured is required to pay any further charges.

·         Prior authorization, this is certification presented to the health care provider to show the insurer agrees to pay for full or some of the services.

·         Explanation of benefits, this is a document offered to the insured by the insurance firm to show the charges incurred and how they arrived at the amount paid by the insured and the insurer.

Dental insurance covers costs incurred for dental care. There are three categories of dental cover,

·         Indemnity, this type of cover allows the insured party to visit any dentist who accepts insurance.

·         Dental health managed organizations (DHMO), this type of cover involves the insurer referring the insured to a dentist belonging to their network.

·         Participating provider network (PPO), this type of cover allows the insured to visit an out-of-network provider or Non-participating provider. Any difference in payments is borne by the insured unless specified in the insurance policy. 

life insurance

This is a type of insurance that is provided to benefit the next of kin or a specified beneficiary after the loss of the insured or as otherwise specified. The insurance policy provides for the amount to be paid in a one off payment or an annuity.  The funds can be used to settle funeral expenses or become income for the insured in case the insured outlives their other finances in form of an annuity. Cash values can be accumulated in some life insurance policies which can be used as security when borrowing or taken to be utilized by the insured. In some countries such as the United States and United Kingdom the tax laws stipulate that interest on cash value does not attract taxes in some instances.

Property insurance

This is a form of insurance that covers property from risks such as harsh weather, fire and theft. This type of insurance may form the basis of other more specialized insurance policies such as home insurance, crop insurance other forms are outlined below:

Boiler insurance, this is a type of insurance that covers loss, accidental physical damage to machinery, boiler and equipment.

Crop insurance, this type of industry plays a major role in the agriculture sector and the policy is mostly taken up by farmers who are out to insure their crops. This policy offers a mitigating factor in case of an occurrence such as pest attacks or when the weather fails the crops.

Vehicle insurance

This is a type of insurance purchased for motor vehicles cars, motorcycles and trucks. The purpose of this insurance is to cover the risk of loss of the vehicle or physical damage/injury during an accident and any liability that may follow. In many countries it is mandatory for vehicles to be insured although different areas are experimenting with pay- as- you go type of insurance.

 The United Kingdom introduced a mandatory third party personal injury cover at least for all the vehicles used on the road in 1930. The Road traffic Act of 1988 modified in 1991 requires vehicles to be insured, have a deposit with the Accountant General of the Supreme Court to cover against personal and third party loss or injury or put up security.  The law allows enforcement officers to request the insurance certificate from a motorist to be immediately produced on request. All vehicles on the road in the UK are required to display a vehicle excise license or a tax disc obtained on purchase after producing an insurance certificate.

In the United States vehicle insurance covers the policy holder and any other party operating the vehicle given they are not specifically excluded in the contract or live at the same address as the policy holder. An operator of the vehicle living at the same address as the policy holder should be covered specifically in the policy.