What is Insurance ?
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.
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.
We have seen that there are several requirements to be met before a risk is commonly insurable. The result is that while several risks are not insurable, for example obsolescence, there are many which are, and the following brief notes will give the reader an awareness of the essentials of most of the policies available.
Benefits of insurance
The existence of a common pool, operated by insurance companies, brings with it many advantages including the following:
It relieves those insuring from the worry and anxiety they may have about how they would meet the cost of risk. In the case of businesses, this is a positive stimulus to their activities and allows them to get on with their own business in the knowledge that they are financially protected against many forms of risk.
Business people will be more inclined to risk their money by building factories, making goods, sailing ships, flying planes, with the knowledge that they will not lose everything should they fall victim of some risk. This is an extremely important benefit which insurance brings – not only to the individual insuring but to the whole country – as stimulating businesses makes for a healthy economy.
Insurance also can help in actually reducing losses. Insurance companies have a great deal of experience in risks of all kinds and, over many years, they have found ways in which certain risks can be reduced. They employ surveyors who go out and look at premises which people may want to insure. They can, from that experience, often suggest ways in which the likelihood of some risk occurring may be reduced. They might see some hazard which could injure employees, or a host of other problems. The advice and the recommendations they make on behalf of insurance companies cannot help but reduce the likelihood of many of the risks occurring.
One further benefit derived from the transaction of insurance is the use to which the insurance company puts the money it holds in the common pool. It does not use immediately all the money it collects as premiums. It holds it until one of the members of the pool suffers a loss. The money it holds is invested in a wide range of investments which all go towards aiding government, industry, commerce and consequently the whole country. A visible symbol of one of the uses to which insurance funds are directed is the building work being carried out in many of our cities. Look a little closer at the large signs surrounding these building sites and notice how many are being funded by insurance companies.
Think for a moment of what would happen in the absence of insurance. Certainly the benefits we have already listed would be lost and there might be considerably less industrial and commercial activity. Life would still continue on a personal basis and there would also be a considerable volume of business activity. Presumably, also, risks would still occur and losses would be suffered.
Who would provide compensation? Who would pay compensation to the injured motor accident victim, who would pay for the repair of damaged property? In short, who would provide the money which the current insurance market provides? At the moment, insurance companies pay out many millions of pounds every single day of the year and it seems likely that if it was not for insurance, this burden, or at least part of it, would be met by society at large. That would mean each one of us would have to contribute much more than we do now in taxation.
In relieving the state of this burden, the insurance industry performs a considerable public service.
We mentioned earlier that insurance is transacted all over the world and a great deal of the practice of insurance in other countries is based on the principles and practice of insurance in the United Kingdom. Britain led the way in the development of insurance, which is not surprising as it was one of the earliest industrialized nations. Since the Industrial Revolution, and even before, the insurance industry in the UK responded to the need for new and more sophisticated forms of insurance protection.
The UK is held in high regard as a centre for insurance and a large volume of insurance is purchased in London by overseas countries. Why is this fact included in a list of the advantages of insurance? The answer is that the UK benefits from the flow of premiums paid to insurance companies in this country from people and businesses abroad.
We could go on and single out further, more complex benefits derived from the transaction of insurance, but those we have listed are enough to show that a healthy and vibrant insurance industry is of major importance to the nation. In the act of creating the common pool, security and peace of mind are provided, the likelihood or severity of losses may even be reduced, vast funds of money are invested for the prosperity of the economy, the country is relieved from what it may look upon as a financial burden to compensate the victims of loss and, finally, the country gains large amounts of money from the payment of premiums into the UK from overseas. All this from the simple act of paying an insurance premium.
Why have insurance?
Pick up a newspaper any day of the week and you will find details in it of the normal everyday risks of life which face us all. At first you may not recognize them as risks, but now you are involved in insurance, you will gradually look upon these reports in a different light.
What kind of reports do we mean? Frequently, there are stories of people being involved in road accidents, of planes crashing, buildings burning down, the theft of goods, people being injured at work and many more. Behind each story lies a measure of personal tragedy and anxiety for those closely involved. Yet behind each one is also the vast, sophisticated mechanism of insurance. Where this mechanism is used properly, it can do much to alleviate financial hardship when a risk becomes reality. Insurance is there to help the unfortunate few who find themselves the victim of loss or accident. It is available not only to private individuals but also to commercial and industrial concerns. Insurance is carried on all over the world and is a multi-million-pound business.
Why have insurance at all? To provide an answer to this question, we could go back and look at the incidents we have already mentioned – the incidents you can read about in any newspaper. Let us start by looking at a road accident. What might be involved in such an incident? A car may knock down a pedestrian, two cars may be involved in a collision, there may be a pile-up on a motorway. Any one of these events is not uncommon. Take the second one, two cars in collision. There will be damage to both vehicles, which must be repaired, and possibly even damage to other property such as walls or lamp-posts. It might be necessary to pay a garage to tow the cars away from the road. People may be injured. They could lose wages through time off work, require special medical care, and compensation would be due to be paid to them by whoever was responsible for the accident.
So from a simple report of a car accident, we begin to see how costly it can become not only in human terms but also in financial terms. People would be very unwise if they did not purchase insurance to protect themselves against having to meet some of those costs. Of course, some forms of motor car insurance are compulsory and must be purchased by all car users. Another commonly reported risk – which illustrates the need for insurance – is damage caused by fires. Fire damage is bad enough when it strikes at home, causing distress and financial loss. We will see later that a form of insurance is available to provide people with compensation when their homes or possessions are destroyed by fire; but when it strikes in industrial or commercial premises, the results can be even more devastating. Not only will there be the physical damage brought about by the fire, but there will be a whole range of other losses with which the owner will be faced. In the case of a shop it will no longer be possible to sell goods. With a factory, the manufacture of goods will cease. In either event, the owner’s source of income will be lost. Who then will pay the owner and, even more important, who will pay the employees and meet all the other costs which must still be borne?
Even after the building is repaired, there is no guarantee the business will get back to its normal level of trading. Customers, in the meantime, may have gone elsewhere and found a new supply or the employees may have left the firm, which now may have difficulty finding trained staff. Faced with these risks, it is sometimes difficult to see why many people operate businesses. They are certainly in need of some financial protection and they can find it in the purchase of insurance.
So insurance exists because people need security. They want to own houses, run cars, sell goods, build factories, fly planes, sail ships, but at the same time, they do not want to be exposed financially to all the risks involved in these Endeavour’s. Insurance gives them the security they need. It gives them peace of mind, it relieves them of a great deal of financial hardship, and in some cases helps to avoid bankruptcy. Insurance does not take away the risk. The house may still burn down, the car may be in an accident but at least a large element of the cost involved will be met by the insurance company.
Types of Insurance
General insurance
The term ‘general insurance’ refers to all classes of business except life insurance and related forms of cover. Life and related covers are commonly included under the heading ‘financial services’ and are dealt with separately below.
Home insurance, Accidental cover and "all risks" cover, Property insurances for businesses and other organizations, Commercial and industrial "all risks" Liability, Small business and traders' policies, Motor Engineering, Marine, Aviation, Business interruption, Book debts, Miscellaneous
Financial services
The term ‘financial services’ can refer to a broad industry sector which includes insurance, banking and other subjects. But within the insurance industry this term has a more specific meaning, describing life insurance and related forms of cover together with retail investment products like unit trusts. Although not insurance as such, these products are commonly handled by the same financial advisers who deal with life insurance.
Over half of the insurance arranged in the United Kingdom falls into this category. The main types are considered below. It is good to note that insurance is as concerned with what happens to people as it is to property.
Personal accident (and sickness), Permanent health insurance/income protection insurance, Ordinary life insurance, Critical illness insurance. Pensions and annuities
